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Source link: http://archive.mises.org/8268/corporate-taxes-suffocate-growth/

Corporate Taxes Suffocate Growth

July 9, 2008 by

The historical and current belief is that taxes in America are low, compared to the world in general. America is the model of free markets, low regulation, and economic freedom. Right? This is simply not the case, write Terrell Sterling. The United States has high taxes in general and higher corporate taxes in particular.

The only nations who have a higher corporate tax rate than America are Suriname, Pakistan, Togo, Benin, Republic of Congo, Cameroon, Chad, Libya, and Vietnam. No information was available for The Democratic Republic of Congo, Iraq, North Korea, Montenegro, Serbia, or Sudan. I cannot imagine why.

Lower corporate taxes are associated with economic growth. This can be shown a priori and empirically. FULL ARTICLE

{ 19 comments }

Arend July 9, 2008 at 8:15 am

Nice, and very true, article. I’m afraid though, that Obama’s ideological presuppositions aren’t that sensitive to such things as logic and facts. That’s the whole point of politics. There, it’s not about “what is” , but “what should” by degenerate and anti-civilization standards. And we (except for the benificiaries of this fascist system) are worse off because of it.

fundamentalist July 9, 2008 at 8:44 am

Nice article! Thanks! We should keep in mind that government debt reduces investment in the same way that taxes do. Every dollar invested in state bonds is a dollar that doesn’t go toward private capital accumulation. Tax cuts that increase the deficit, and therefore increase federal borrowing, have little to no effect on investment. The problem isn’t so much the tax rate, as total federal spending.

BlackSheep July 9, 2008 at 8:46 am

What I don’t get about the idea of the corporate tax is that the profits of the firm are already taxed because the shareholders or the otherwise business owners will pay their income taxes on them… Why isn’t this considered double taxation?

spencer July 9, 2008 at 9:38 am

I keep seeing these stories about statutory corporate tax rates.

But in the US the effective corporate tax rate is under 25% rather than the statutory rate of some 35%. That makes the US effective rate lower than the European and Japanese statutory rate.

How about giving us an apples to apples comparison.

You do know what the comparable effective rates in Europe and Japan are, don’t you?

What about the Irish? July 9, 2008 at 9:57 am

Perhaps the most startling example of what reducing corporate taxes do is the country of Ireland. The primary instigator of the Irish economic engine has been the reduction in business taxes. Of course at this point lots of EU businesses crammed into Ireland to get the tax breaks.

What does the EU do? Try to have Tax Fairness!!! And the US?

JimC July 9, 2008 at 10:13 am

Blacksheep:

I beleive the argument is that because corporations are granted the status of “legal persons” in order to limit the liability of the shareholders, they can also be taxed just as “natural persons”. The shareholders trade off reduced income, due to the corporate tax, in return for legal protection from personal liabilty for the corporation’s debts (or torts) beyond the value of their investment. Under this doctrine, because the corporation is a “legal person” separate and distinct from the shareholders (the meaning of the word “corporation”) this does not constitute double taxation.

As a creature of the state it stands to reason that a corporation would be subject pay taxes to the state, certainly more so than natural persons who have a natural right to the products of their labor. Whether or not it is just for the state to legislatively limit the liability of an association of individuals or necessary for the state to create “legal persons” by chartering corporations inorder for limited liability associations to function are valid questions.

Rothbard argues in Power and Market that corporations could arise through voluntary contractual limits on personal liabilty among the shareholders and officers of a corporation and those who choose to transact business with them. In practice such voluntary limits are not legally recognised by the state in the absence of a state granted corporate charter, which also makes the corporation subject to taxation.

Without the “legal personhood” granted by the state mandated corporate charter taxing the income of the association as a whole then taxing the income of the individual memebers is clearly double taxation. Under methodological individualism we understand that an association not exist in itself separate from the indiviuals that make it up. The absurd legal fiction of the “corporation” is merely the means by which the state asserts the authority to double tax individuals who join together in limited liability associations.

Allen Young July 9, 2008 at 10:24 am

07/09/08am Federal taxes are not the “problem”. Instead it always the reason we have federal taxes. Bloated, pandering, irresponsible, harmful federal SPENDING. For which congress is principally at fault.
To remedy this I suggest items that may seem drastic:
1) Abolish all federal taxes on corporations. Because all that are successful include these taxes in the prices they obtain.
2) Abolish all federal withholding. Each pay-, each interest-, each dividend day; each taxpayer has to address an envelope, write a check to the IRS and mail it. The IRS trains and commissions an army of nasty collectors who harrass laggards. Soon some will begin to ask: “Is this money, my money, spent on something that benefits someone I think worthy?”
3) Congress persons forbidden in D.C. at all times – other than 90 calendar days – every other year. Any found in D.C. at other times immediately lose her/his “seat”. And, cannot run again.
4) No congress person may sponsor, or vote on, any bill that benefits only her/his district or state.

Never shall federal SPENDING be hidden. By putting the payment for it off to future generations.
That is a major fraud. Because it hides it, and because it is a considerable incentive for debasing the currency. By running the printing presses. Inflation.

You imagine I’m kidding?

Fiddlings of taxes are farts in a gale.

Allen Young

Allen Young July 9, 2008 at 10:24 am

07/09/08am Federal taxes are not the “problem”. Instead it always the reason we have federal taxes. Bloated, pandering, irresponsible, harmful federal SPENDING. For which congress is principally at fault.
To remedy this I suggest items that may seem drastic:
1) Abolish all federal taxes on corporations. Because all that are successful include these taxes in the prices they obtain.
2) Abolish all federal withholding. Each pay-, each interest-, each dividend day; each taxpayer has to address an envelope, write a check to the IRS and mail it. The IRS trains and commissions an army of nasty collectors who harrass laggards. Soon some will begin to ask: “Is this money, my money, spent on something that benefits someone I think worthy?”
3) Congress persons forbidden in D.C. at all times – other than 90 calendar days – every other year. Any found in D.C. at other times immediately lose her/his “seat”. And, cannot run again.
4) No congress person may sponsor, or vote on, any bill that benefits only her/his district or state.

Never shall federal SPENDING be hidden. By putting the payment for it off to future generations.
That is a major fraud. Because it hides it, and because it is a considerable incentive for debasing the currency. By running the printing presses. Inflation.

You imagine I’m kidding?

Fiddlings of taxes are farts in a gale.

Allen Young

Keith July 9, 2008 at 12:05 pm

Quote from Blacksheep: “Why isn’t this considered double taxation?”

Where is the law against double taxation? The 16th Amendment says “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Paul Marks July 9, 2008 at 1:03 pm

Comparisons with Japan and with European countries should take note of American State corporate taxes (on top of the Federal tax) – State corporate tax does not really exist in either Japan or in many European countries (such as the one I am writing from – the United Kingdom).

I agree with the comment above concerning the importance of government spending.

For all his many faults, John McCain has a good (by modern standards – i.e. not as terrible as most politicians) record on government spending. Not just on “earmarks”, but also on subsidies and on the out-of-control entitlement programs.

Senator Obama record (both at State level and at Federal level) is rather different – to put it mildly.

But this is to be expected, given Senator Obama ideological training and activist background.

Som July 9, 2008 at 1:31 pm

I have a feeling that most American corporations don’t mind paying this tax because:

1. Established corporations are willing to bear it because it serves as a sort of barrier to new companies trying to incorporate. New companies have less certainty on how much profit they can hold on to after paying this tax so its more likely to pose too much risk, where as established corporations know from experience they can withstand the taxation (or so they believe in the long run)

2. Established corporations have many more benefits given to them from the government, in the form of subsidies, regulation that inhibits newcomers, projects made available from government mandates, etc. and I doubt they want to share this privilege with lots of other competing corporations.

3. These established corporations get to control a bigger piece of the government! I mean, if I was on the board of directors of a corporation getting taxed 40% or more, I would go to up the government thugs (or do i repeat myself) and say “Hey man, this is pretty high tax on us and I know you’re getting lots of money from us, and if we go under since we’re losing profit you’re gonna lose all that free money coming in, so I know you don’t want us to go down either. So how about you help us increase our profits, since the more money we get, the more money you get to take. How about you make us both lots of money by taking out a few of these shops here through imminent domain so we can put our new factory there, and increase that tariff on our foreign competitors while you’re at it? They seem to be chewin at our side alot more these days. Oh and you said you want to start a war? Great! I’ll let you know which country we can get the most expansion out of and we’ll take it from there, talk to ya tomorrow!”

And of course these three reasons can support each other and create a rather vicious cycle. However, if one day these corporations decide that they are sick of this tax and push to end it, it will probably disappear soon after. The ultimate reason why this tax exists is because the very people paying for it want it there, helping create caste-like stratification for big established business, while consequences to the rest of us be damned

Shishir July 10, 2008 at 1:17 am

[i]“The ultimate reason why this tax exists is because the very people paying for it want it there, [/i]

Not really… You assumption all corporates are big and established ones is flawed !

Shishir July 10, 2008 at 1:18 am

[i]“The ultimate reason why this tax exists is because the very people paying for it want it there, [/i]

Not really… You assumption all corporates are big and established ones is flawed !

Arend July 10, 2008 at 4:57 am

@ “spencer

I keep seeing these stories about statutory corporate tax rates.”

I think it’s fine by everyone when you want to ride on the relativity train. But then again, isn’t there some fundamental critique to these taxes as such? And aren’t those covered by the article above?

As a Dutchman I can assure you that all those mailbox companies in Amsterdam aren’t there to satisfy their masochist tax wants. It’s because there exists something like “tax competitiveness”; behind-the-scene schemes created to lure big companies within one’s national borders, giving them low to no taxes in exchange for employment – it’s he process which George Soros calls “market fundamentalism” (a misleading term of course), and which is essentially neoliberalism in the Angelsaksian sense (and neo-social(ist)-democratism in the Euro-Continental sense). It’s a process caused by the (per definition) unsustainable welfare states in Europe where the workforce has to remain constant or grow all the time to sustain the welfare arrangement for a larger and larger group of inactive people (b/c the babyboom generation is retiring).

By the way: for middle to large companies the tax scheme in the US isn’t in competition with the EU tax scheme, because those kind of companies are likely to choose both locations for regional hq’s. The tax scheme competition is actually within the EU.

DS July 10, 2008 at 5:38 am

First of all, coporations don’t pay taxes, they collect taxes.

Corporate taxes are paid by the customers, employees, shareholders and suppliers of each corporation. The corporate tax is simply a vehicle with which to mask the the true burden of taxation – rest assured every single penny of the corporate tax is paid by a citizen, they just don’t realize it because its embedded in the prices they pay for products, reduced wages for the employees corporation and loss to the shareholders of that business.

Thinking that the corporate tax somehow makes corporations “pay their fair share” for the funding of the government is a fundamental misunderstanding of what a corporation is. It is economic illiteracy at its most basic level. Or a bald-faced lie – take your pick which one is worse.

“But in the US the effective corporate tax rate is under 25% rather than the statutory rate of some 35%. That makes the US effective rate lower than the European and Japanese statutory rate.”

Setting aside all of the state corporate taxes that corporations pay (addressed earlier), the reason that companies pay a lower tax rate is because they engage in inefficient behaviors that the government has allowed corporations to deduct from their taxable income, or in laymans terms “loopholes”. Or a more direct issue is that companies can reduce their tax burden by doing things that result in a loss in profit (at least on paper). Each of those loopholes (and there are tens of thousands of pages of them) was put in by some congressman trying to entice corporations to engage in some actvity his constituents think will benefit them, but is not economically justified for a business to do without some incentive. The result of all these distortions is less capital and effort going productive activities.

the lesson here is that the goverment creates incentives for companies to behave in uneconomic ways or just plane rewards them for losing money. Yeah, that makes a hell of a lot of sense.

In short – the difference between the nominal and effective rates is pure, unadulterated mal-investment. This is a time honored government trick and goes on in all countries, not just the US.

“Fiddlings of taxes are farts in a gale.”

Every time I hear some Republican talk about how fiddling with the tax code will make the economy run better AND collect more taxes I want to cringe. Why is collecting more taxes a good thing and how does that help the economy? Whenever I hear this argument I can’t help but come to the conclusion that this is just a way to say that they want to spend more money and magically not make anybody have to actually pay for it. At least the Democrats are mildly more honest (just by a hair) when they say that all the spending they want to do will result in other people (not you, though) paying taxes.

Government spending is at the root of this evil, once the money is spent the government can get it by taxing, borrowing or creating inflation. None of those are prefferable to the other.

Som:

I think your analysis is a bit of a stretch but I will grant you that I don’t ever see corporate CEO’s publicly lobbying to reduce the corporate income tax. They do seem to publicly lobby for subsidies and and tax “loopholes” on a continual basis, so you got that going for you. But remember, corporations don’t pay taxes, they just collect them for the government.

It’s an interesting idea that since corporations fund about 1/3 of the Federal government that they should expect a place at the table, but that is balanced by the fact that corporations can’t vote – this is pretty important to elected officials.

“However, if one day these corporations decide that they are sick of this tax and push to end it, it will probably disappear soon after.”

I sincerely doubt that – I think you are misunderstanding just who is the servant and who is the master in this relationship. This would require shifting the tax burden directly to the citizens or reducing govenment spending substantially. What voter-facing politician is going to do that? At best this would have to be engineered in an entirely clandestine manner – which is actually what we have now.

This is not even a remote possibility.

DS July 10, 2008 at 5:39 am

First of all, coporations don’t pay taxes, they collect taxes.

Corporate taxes are paid by the customers, employees, shareholders and suppliers of each corporation. The corporate tax is simply a vehicle with which to mask the the true burden of taxation – rest assured every single penny of the corporate tax is paid by a citizen, they just don’t realize it because its embedded in the prices they pay for products, reduced wages for the employees corporation and loss to the shareholders of that business.

Thinking that the corporate tax somehow makes corporations “pay their fair share” for the funding of the government is a fundamental misunderstanding of what a corporation is. It is economic illiteracy at its most basic level. Or a bald-faced lie – take your pick which one is worse.

“But in the US the effective corporate tax rate is under 25% rather than the statutory rate of some 35%. That makes the US effective rate lower than the European and Japanese statutory rate.”

Setting aside all of the state corporate taxes that corporations pay (addressed earlier), the reason that companies pay a lower tax rate is because they engage in inefficient behaviors that the government has allowed corporations to deduct from their taxable income, or in laymans terms “loopholes”. Or a more direct issue is that companies can reduce their tax burden by doing things that result in a loss in profit (at least on paper). Each of those loopholes (and there are tens of thousands of pages of them) was put in by some congressman trying to entice corporations to engage in some actvity his constituents think will benefit them, but is not economically justified for a business to do without some incentive. The result of all these distortions is less capital and effort going productive activities.

the lesson here is that the goverment creates incentives for companies to behave in uneconomic ways or just plane rewards them for losing money. Yeah, that makes a hell of a lot of sense.

In short – the difference between the nominal and effective rates is pure, unadulterated mal-investment. This is a time honored government trick and goes on in all countries, not just the US.

“Fiddlings of taxes are farts in a gale.”

Every time I hear some Republican talk about how fiddling with the tax code will make the economy run better AND collect more taxes I want to cringe. Why is collecting more taxes a good thing and how does that help the economy? Whenever I hear this argument I can’t help but come to the conclusion that this is just a way to say that they want to spend more money and magically not make anybody have to actually pay for it. At least the Democrats are mildly more honest (just by a hair) when they say that all the spending they want to do will result in other people (not you, though) paying taxes.

Government spending is at the root of this evil, once the money is spent the government can get it by taxing, borrowing or creating inflation. None of those are prefferable to the other.

Som:

I think your analysis is a bit of a stretch but I will grant you that I don’t ever see corporate CEO’s publicly lobbying to reduce the corporate income tax. They do seem to publicly lobby for subsidies and and tax “loopholes” on a continual basis, so you got that going for you. But remember, corporations don’t pay taxes, they just collect them for the government.

It’s an interesting idea that since corporations fund about 1/3 of the Federal government that they should expect a place at the table, but that is balanced by the fact that corporations can’t vote – this is pretty important to elected officials.

“However, if one day these corporations decide that they are sick of this tax and push to end it, it will probably disappear soon after.”

I sincerely doubt that – I think you are misunderstanding just who is the servant and who is the master in this relationship. This would require shifting the tax burden directly to the citizens or reducing govenment spending substantially. What voter-facing politician is going to do that? At best this would have to be engineered in an entirely clandestine manner – which is actually what we have now.

This is not even a remote possibility.

BlackSheep July 10, 2008 at 6:26 am

“But in the US the effective corporate tax rate is under 25% rather than the statutory rate of some 35%. That makes the US effective rate lower than the European and Japanese statutory rate.”

Could you elaborate on this? (please notice I’m not American)
If you are talking of cost deductions, we also do that here. The corporate tax is on profits, not revenue. If you mean by “effective” that when calculated against the revenue it’s lower, then duh. ;)

Inquisitor July 10, 2008 at 9:56 am

Spencer, why don’t you tell us their effective rates?

corporateshill July 11, 2008 at 6:43 am

Anyone know about compliance costs and the costs to find and implement the loopholes?

I would consider these costs to be taxes as well.

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