Trickle Down Economics and corporations

How corporate taxes cost jobs

from JoeUser Forums
The problem with supply-side economics as a theory is that it's too broad. When dealing with tax rates, there are really two completely different tax debates. First, you have the individual tax rate. And secondly, you have the corporate tax rate.

Individual tax rates in the United States are too high at the higher levels. But I don't believe that lowering this rate would improve the economy in any noticeable way. Contrary to what Bush thinks, whether the money is in individuals hands or in the hands of the government, it's still being spent. The economy is much more affected by consumer confidence than anything else in my opinion and I would say Bush made a big mistake wrecking the surplus for tax cuts. Consumer confidence, I suspect, is higher when the government is paying off its massive debt than a few hundred bucks in tax cuts on a typical household.

Corporate tax rates, on the other hand, do affect the economy. Every liberal I know always claims to various degrees how corporations don't pay taxes. But a simple look at the federal revenue stats show that obviously corporations are paying taxes. Those billions in tax revenue are coming from somewhere. And I believe that nearly every penny of that money is harmful to the economy overall. The companies making the profits are the ones who are obviously the most effective at managing their resources. So why punish them? In addition, the federal tax system is...well idiotic. At $49,999 of profit the corporate tax rate is 15%. At $50,001 it jumps to 25%. And Michigan, where Stardock is based, has the ridiculous "single business tax" whereby corporations cannot deduct wages as an expense. Meaning you can lose money and still pay taxes in Michigan.

But it gets worse. At $100,000 in net revenue, companies pay 39% of their net to the government. Again, a liberal will argue how corporations find "loopholes" to get out of paying this. Hey, if you think that, then show me the money because I'd love to hear about specific loopholes.  Sure, some companies manage to make tax deals with state and local governments. But that doesn't affect their federal taxes. In addition, while you do occasionally hear about some elaborate shell games being used to keep tax payments down by some fortune 500 company, the fact is that most people are employed by small and medium sized businesses. I know a lot of business owners and virtually all of them operate quite transparently from a tax point of view. They simply are trying do what their business does. That's what we do as well.

Not that that stops me from asking our accountants about these loopholes I always hear about at dinner parties. My accountants say that most loopholes fall into the urban legend category.

A company that nets $300,000 in revenue this year is going to pay $117,000 in taxes on that. The question then comes, who is better at spending that $117,000? The business that just proved its effectiveness by being so profitable or the government who wastes money at an incredible rate because no one feels responsible for it?  What would the typical successful small business do with that? If you listen to some people you will hear something like "The owner will just buy a boat." People who say that kind of thing have one thing in common: They've never run a business. Most small business owners would take that money and give some raises probably to key employees, hire another employee, improve infrastructure, and perhaps give themselves a reasonable bonus. 

The thing to remember though is that bonuses and raises are taxable. So the government doesn't lose that tax money. Similarly, if the corporation hires more people, what's happened? More tax payers.

Of course, Bush has done virtually nothing to help businesses,  particularly small businesses. This isn't a Republican vs. Democrat issue as much as it is a basic misunderstanding of economic forces. We do live in a society that increasingly tries to demonize the very entities that provide jobs -- corporations. Cutting corporate tax rates would have virtually no negative effect and provide great benefits to society in the long run through economic growth. Instead, we currently punish the most successful companies at the very time we should be trying to encourage hiring and expansion.

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17,718 views 7 replies
Reply #1 from JoeUser Forums Top
Major loopholes may very well be a myth for smallish businesses; I don't know enough about it to say. But, for larger corporations:

http://www.prospect.org/print/V13/9/mcintyre-r.html
"If big corporations actually paid 35 percent of their U.S. profits in federal income taxes, as the tax code ostensibly requires, corporate income taxes this year would total at least $308 billion. But actual corporate-tax payments this year are expected to be only $136 billion. In other words, this year (and next), for the first time since the early 1980s, corporate-tax loopholes will actually cost the U.S. Treasury more than the amount companies pay in income taxes.
...
Microsoft enjoyed more than $12 billion in total tax breaks over the past five years. Microsoft, in fact, actually paid no tax at all in 1999, despite $12.3 billion in reported U.S. profits. Microsoft's tax rate for the past two years was only 1.8 percent on $21.9 billion in pre-tax U.S. profits.

General Electric, America's most profitable corporation, reported $50.8 billion in U.S. profits over the past five years, but paid only 11.5 percent of that in federal income taxes. That low tax rate reflected almost $12 billion in corporate-tax welfare.

Ford enjoyed $9.1 billion in corporate tax welfare over the past five years. It reported $18.6 billion in U.S. profits over the past two years but paid a tax rate of only 5.7 percent.

WorldCom paid no taxes at all in two of the last three years, despite reported U.S. profits of $15.2 billion. WorldCom's total tax rate over the three years was only 1.6 percent.

IBM reported $5.7 billion in U.S. profits in 2000, but paid only 3.4 percent of that in federal income taxes. In 1997, IBM reported $3.1 billion in U.S. profits; instead of paying taxes, it got a tax rebate. Over the past five years, IBM enjoyed a total of $4.7 billion in corporate-tax welfare.

General Motors paid no taxes at all in three of the last five years, despite $12.5 billion in reported U.S. profits. GM's tax rate for the past three years was negative 1.3 percent.

Enron paid no income taxes at all in four of the past five years, despite $1.8 billion in reported U.S. profits. Enron's total taxes over the five years were a negative $381 million. Its corporate-tax welfare totaled $1 billion.

Rounding out the list of 10 are the El Paso (energy) Corporation, Colgate-Palmolive, and the Navistar (trucking) International Corporation, all with similar stories."

http://www.j-bradford-delong.net/movable_type/2003_archives/000451.html
"The [Bermuda] loophole allows big companies to pretend legally that they are based offshore (Bermuda has been the country of choice) and then filter profits through a third country (most often Barbados), avoiding American income taxes. The administration and the Republican leaders have said the loophole should be closed but have emphasized that flawed tax laws are forcing companies to make the Bermuda move."

There are lots more resources out there. But as a first point, I don't personally find it very, um, thorough to oppose corporate taxes and deny the existence of loopholes while completely failing to mention corporate welfare.

I think you're oversimplifying a very complex issue here.

-Scott G-S
Reply #2 from JoeUser Forums Top
I don't think anyone out there thinks that corps pay no taxes at all, although apparently some very profitable ones (like, say, G.M.) manage to avoid taxes pretty damn effectively. And your point about smaller companies not being able to avoid taxes in this manner is well taken.

When most people talk about loopholes and corporate welfare, the examples I mentioned is what they're thinking of, not small business. And to me, the fact that corporations are using loopholes to get out of over half of the taxes they would otherwise pay is important, and complicates matters greatly. I mean, wouldn't a good first step be to close a large number of these loopholes, while slightly lowering the overall rate? Wouldn't this help the smaller businesses who can't/don't take advantage of loopholes without lowering tax revenues? Or would the detrimental effect on corporations be too profound? How do you balance the two, based on number of jobs provided, and where those jobs will go?

See, this is why I say you're oversimplifying: because to really sort out what the best first policy steps would be requires a hell of a lot of knowledge of tax code, especially as applied to corporations, but also as it affects small business. It seems to me you'll need to also find out a lot about how widespread the effects will be, and who they'll affect. "Lower the rate" seems to me simple, neat, and wrong.

(And, it's worth pointing out, $136 rather than $308 billion is a pretty significant mythical loophole. :)
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Reply #3 from JoeUser Forums Top
I don't think I'm over simplifying. I am trying to counter the long standing assumptiong that corporations don't pay taxes. Corpos are still paying $136 billion dollars in taxes. While not the $308 billion that one might expect, the issue is currently two fold:

Big companies with the resources to play accounting games are let off the hook entirely while smaller companies are paying far too high in taxes.
Reply #4 from JoeUser Forums Top
I would seriously question the numbers McIntyre gives as examples of tax loopholes, at least in the case of Ford I know the numbers to be false. In the fiscal years 2001 and 2002 (which I assume the article refers to since it was written in 2002 and not the same as tax years but good enough for this) Ford had losses totaling 6.5B, so where this McIntyre guy came up with an 18.6B profit is beyond me. Although it is interesting to note that in 2001 Ford expected a 2.1B tax refund, after a 7.4B loss. If you have any doubts you can look at the financials yourself.

http://www.ford.com/en/company/investorInformation/companyFinancials/annualReports/default.htm

As far as the other companies listed in the story, I don't know them to be false but they look a little suspicious to me. I guess the moral of the story is don't take unsubstantiated numbers from a "Taxonomist" at face value.
Reply #5 from JoeUser Forums Top
This address your original point about the trickle down theory, not loopholes.
I agree that trickle down theory does work for most Americans (top 70%). You are also correct by your assumption of the type people that make uneducated comments in attempt to disprove theories have been developed accepted and used for many years. These types have never ran a business or earned a degree in business or economics.

But I do believe that trickle that theory becomes very questionable when you are talking about the bottom 30% of the people living this country. The bottom group has been classified as being structurally disadvantaged, meaning there are characteristics (Poverty, Substandard education, crime etc) within their environment that doesn't allow the trickle down theory to apply. In my opinion trickle down theory is not the only one, I believe that monetary policy is not as effective in these areas because most banks are reluctant to give credit to impoverished neighborhoods. Well that's a different subject. But if you are talking about a larger portion of the population your theory does apply.
Reply #6 from Stardock Forums Top
I'm impressed, very good arguement and I'll be a little kinder in thought to corporations. Running www.altposters.com (a little co-op of artists who design concert posters) I'm always disturbed by the fact that our fed taxes are around 15%, harsh for the self-employed whom can never guarentee hours, wages or success. Additional, self-employment is what gets people through rough patchs in the economy and rarely is it a 3-figure adventure, its more often a struggle to eek out a living and being taxed at such a high rate is harmful to keeping it a consistant form of employment for many.