Tuesday, March 3, 2009

Corporate Tax Loopholes, the ‘Fosbury Flop’ and Economic Growth

Are you tired of seeing the big corporations and banks and investment bankers on Wall Street get all the corporate tax loopholes and special deals from Congress insiders?

Maybe the time has come for a sure-fire way to eliminate all corporate loopholes once and for all. Oddly enough, at the same time, this one proposal could provide the shock treatment we need right now to resuscitate the economy and create millions and millions of new jobs for the foreseeable future.

Did you know that in the most recent tax year, corporations were able to avoid paying over $104 billion in corporate income taxes to the federal government? Through amendments and legislation that thousands of lobbyists have helped get through Congress over the last 50 years or so, both large and small corporations have managed to avoid paying at least that amount to the U.S. Treasury.

The total amount of money paid to the US Treasury in 2008 by U.S corporations was $370 billion or about 2.7% of GDP.

The corporate tax code is bringing in somewhere between 50% and 70% of the potential revenues it was designed to generate each year, depending on the reports you read.

Maybe it is time to consider abolishing the corporate tax code completely.

Yes, you read that correctly. Any time something is working at less than 70% efficiency, perhaps it is time to can it and try something else that might work better. Getting below a 70 on any exam is an “F” in anyone’s book.

If we are going to run massive deficits anyway over the next 2 years to get out of this recession, why not do something so dramatic and “shocking” that it changes the rules of the game forever?

To use a sports-related analogy, Dick Fosbury one day figured out that he could not increase his leap in the high jump with the traditional “Western roll” technique he had been taught since his youth. He decided to jump over the bar backwards with his head first, won gold at the 1968 Olympics and revolutionized the high jump forever.

No one does the ‘western roll’ anymore…every high jumper in the world uses the “Fosbury Flop” in some version or another.

If we repealed the corporate tax code today, the rules of investing in new plant and equipment in the US would change forever. We could see a massive effort to move operations back to the United States and trillions of dollars of new investment flow into the stock and credit markets to take advantage of the new “corporate tax-free zone” called America.

Here’s the most critical thing to remember about corporate taxes: Any tax paid by a corporation at the state or federal level is passed along to consumers in the price of the product or service.

And if there is no corporate tax to pay anymore, there are no “loopholes” for lobbyists and corporations to try to insert into legislation any longer. Talk about killing two birds with one stone.

There is nothing magical that makes corporate taxes “different” from personal income taxes, excise taxes or capital gains taxes. Every tax paid in this country comes from inside your pocket some way or another, either directly in taxes paid, taxes withheld, or in prices paid for products.

On top of that, corporate taxes are typically taxed twice…once at the corporate level and then second at the individual level when dividends and interest are paid to investors who own mutual funds or stocks.

Somehow we take for granted the notion that corporate taxes will always be collected. What happens in a year like 2008 and now 2009 when many corporations won’t make any profits to be taxed on in the first place? The level of expected corporate tax receipts at the federal level should be far below the anticipated level of over $400 billion based on recent trends.

Large deficits are in store for the next several years anyway…why not abolish the corporate tax code in its entirety and see what happens?

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