Robert Reich's War on Global Capital

Robert Reich, former Labor Secretary in the Clinton administration, has written yet another empty tract. He gripes that "global capital, in the form of multinational corporations as well as very wealthy individuals, is gaining enormous bargaining power over nation states." That "nation states"are floundering isn't because of the "evil" private sector.

Reich's big beef is that corporations aren't paying enough taxes. The title of his May 26 article is: "Lessons from the World of Tax Avoidance: How Nations Can Negotiate with Global Capital." But tax avoidance is perfectly legal; both corporations and individuals have every right to vote with their feet and move themselves and their capital to wherever they're properly appreciated.If you don't want to pay state income taxes, fine, move to Texas. Nevertheless, Reich urges:

One way for nations (as well as individual states or provinces) to regain some bargaining leverage over global capital would be to stop racing against one another and join together to set terms for access to their markets.

After all, global capital depends on consumers, and access to large consumer markets such as the US and the EU is essential if global capital is to earn a healthy return. Why should Apple have access to US consumers, for example, if Apple refuses to pay its fair share of taxes to finance the infrastructure and education that Americans need to improve their living standards? Americans could buy from one of Apple's competitors instead.

Yeah, but Americans want to buy from Apple. That the feds can't control their spending and have devised a rotten tax system isn't Apple's fault. But how much money are we talking about anyway?

According to "Table 2.1 -- Receipts by Source: 1934 -- 2018" of the historical tables at OMB, fiscal 2007 is still the year with the highest receipts, and that goes for total receipts, individual income tax receipts, and corporate income tax receipts, which were $370B. Individual income tax receipts for 2012 would have to be higher by less than 3 percent to be at the 2007 level, but corporate income tax receipts for 2012, which were $242B, would have to more than 50 percent higher to get back to the 2007 level.

Statutory federal corporate tax rates range from 15 to 35 percent. But depreciation, loopholes, write-offs, expensing, etc. make the effective rates lower. Some have urged ending exemptions so that we can lower rates. But why tax corporations at all? With "End the Corporate Income Tax" at The Atlantic in 2009, Megan McCardle wrote:

The corporate income tax may be the stupidest tax we have. At 35 percent, America's levy on corporate income is one of the highest in the developed world. In 2007, about 2.5 million companies prepared lengthy returns at great expense, yet the tax generated only about 15 percent of total federal tax revenue. The tax on corporate profits discourages capital formation, targets shareholders regardless of their wealth, and fuels frantic, and costly, business efforts to dodge it. Among experts who study its effects, support for the tax is at best sort of sheepish. Yet as taxes go, it is relatively popular.

If it's popular it's because the masses don't pay it -- at least, not directly. In 2011, corporate income taxes were only 5 percent of all federal income, and individual income tax revenue was six times higher than corporate income tax revenue. Many Americans may not know that because their income taxes are so complicated that they must retain the services of tax pros to figure their taxes. But that data is right there on page 104 of the instructions for your 2012 Form 1040. According to OMB's Table 2.2, corporate income taxes accounted for only 7.9 percent of total federal tax revenue in 2011, down sharply from what Ms. McCardle cites for 2007.

But if we ended the corporate income tax, we'd be walking away from billions of dollars, making the deficit even worse. How would we make up for that lost revenue?

America would make up for the lost revenue due to repealing the corporate income tax with greater individual income tax receipts from heightened economic activity. If America had no corporate income tax, corporations would race to America to do business, and the trillions sitting in overseas banks would come home.

Dividends also provide part of the solution. The same dollar of profit on which a corporation pays income tax is taxed again if that dollar is distributed to a shareholder as a dividend. But if corporate profits weren't doubly taxed, corporations could dole out more dividends, and those dividends could be taxed as ordinary income since they wouldn't already have been taxed.

At Reason, Veronique de Rugy states that "economists have shown that a majority of the corporate income tax is borne by labor mainly in the form of lower wages." In the Wall Street Journal, Martin Feldstein writes that: "The average [corporate income tax] rate in the other industrial countries of the Organization for Economic Cooperation and Development (OECD) is just 25%."

Corporations are globe-trotting because they're in search of profits, and profits are what corporations get taxed on. With our highest-in-the-world corporate tax rates and our oppressive regulations, we've made America a less attractive destination for capital and capitalists. And what's worse than the onerous rates is the gauntlet of exemptions that businesses must run through in order to get a little tax rate relief. (Watch this segment of "The Kudlow Report," "Tax Reform to Curb IRS Power." Larry makes another powerful case for tax reform. Tea Party types will love this video.)

Here's my idea: eliminate the corporate income tax in stages. Stage 1 would set corporate income tax rates to 1 percent less than the average effective rates of each bracket and would eliminate every exemption in the tax code for corporations. Then, if we see wage gains and more dividends for shareholders, we'd lower the rates again, and so on, down to zero.

The reason progressives in Congress would be against such an idea is because, just as with individuals, they want control. That progressives want to control corporations is seen in Reich's idea that"nation states" should deny their citizens the right to buy from whomever they please. Play ball with us or take your business elsewhere.

Corporations don't really pay taxes; individuals do. When taxes are imposed on corporations, they must pass those costs along to individuals in form of lower wages, fewer dividends, and higher consumer prices. But what's that in comparison to Congress losing its control over us?

Jon N. Hall is a programmer/analyst from Kansas City. 

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