More on the U.S. and Corporate Income Taxes
Monday August 18, 2008
Paul Krugman responds to the paper I linked to in Types of Taxes and Economic Growth by stating:
I cannot agree with the conclusion that this data shows that this is "whole fuss is much ado about nothing". Here's why:
Suppose the 5-10 year data shows the same thing. Then this data, coupled with the statutory rate data suggests that corporate income taxes are reduced a great deal more through deductions and other means than they are in places such as Canada. These deductions are not costless to the economy, since they distort decision making and thus have associated deadweight losses.
I would want to see further data, but from what Krugman has shown my conclusion would not be "this whole fuss is much ado about nothing" but rather "wow, the U.S. corporate tax system is highly complex and distortionary".
Now, the thing you have to realize about corporate taxes is that the statutory rate — the rate you pay after allowed deductions and all that — means very little. That’s because corporations have lots of potential deductions — and can hire the very best accountants to find them, and lawyers to justify them. So any time you see a table that compares the nasty 35% US rate with other countries, you know you’re being snowed.The data Prof. Krugman posts is interesting, but I think you need to examine this kind of data over a 5-10 year period, since corporate income fluctuates a great deal with the business cycle.
A much better indicator is the amount of taxes corporations actually pay. From OECD data (behind a paywall, I think, unfortunately), I get the following for percentage of GDP paid in corporate taxes in some major economies, in 2005:
Canada 3.5
US 3.1
Japan 4.3
France 2.8
Germany 1.7
UK 3.4
So, OK, German profits taxes look low, but basically the United States looks normal. This whole fuss is much ado about nothing...
I cannot agree with the conclusion that this data shows that this is "whole fuss is much ado about nothing". Here's why:
Suppose the 5-10 year data shows the same thing. Then this data, coupled with the statutory rate data suggests that corporate income taxes are reduced a great deal more through deductions and other means than they are in places such as Canada. These deductions are not costless to the economy, since they distort decision making and thus have associated deadweight losses.
I would want to see further data, but from what Krugman has shown my conclusion would not be "this whole fuss is much ado about nothing" but rather "wow, the U.S. corporate tax system is highly complex and distortionary".
Comments
The deductions are not distortionary in as much as the initial rate is not distortionary; they were both created by government shareholders for a specific purpose and thus represent a market rationing, as is normal for supply and demand in any economic sector.
This post reveals the common misperception that Congress does not represent a market mechaniswm. It does perform market functions (though inefficient) with the proper slope for supply and demand.
Does the list of percentages include all those “S” corporations and LLC’s that are pass-through vehicles for small, usually individually owned business? These “corporations” usually pay no tax because all revenues are paid out in costs and salaries. A low percentage paid by corporations could simply reflect the fact that thousand of these corporations have 0 net income.
This makes no sense. You have to take into account the various types of entities available in each country. Quite a few entities in the US are not subject to corporate tax, such as sole proprietorships, LLCs, partnerships, and S corps. For the large companies subject to the corporate tax, it is a *very* big deal.
The subject is only the corporate tax, not the full panoply of taxation. Hardly a big deal since the effective rate is only average, though probably a big deal to some and no deal to others. A complex system? Without a doubt. Those lobbyists don’t work for free. Are the deductions distortionary or rationalizing? Isn’t that the $64M dollar question? I like the market concept. International corps probably pay much less than their domestic counterparts so it may be a competitive advantage.