The rich *are* "job creators"

Think the rich don’t provide jobs? Or that they only provide a few jobs through their investment activities? People with a lot of money spend a lot of money on stuff and services that the many of the rest of us provide!

One example...

Once upon a time we had a thriving yacht-building business in the US. Congress decided that a luxury tax on yachts sounded like a great idea! Tax the rich fat cats splurging millions on yachts, what’s a few hundred thou in extra taxes?! 10% extra tax on boats costing $100K or more (this was in 1990 or so).

The end result was devastating. Thousands in the boating industry lost their jobs (as did thousands in other industries penalized with similar luxury taxes). The rich? They just bought their yachts overseas and avoided the taxes. There is virtually no yacht building or sales left in the US as a result of this tax, even after it was repealed–those jobs were killed but good!

[Walter Williams]

“Within eight months after the change in the law took effect, Viking Yachts, the largest U.S. yacht manufacturer, laid off 1,140 of its 1,400 employees and closed one of its two manufacturing plants. Before it was all over, Viking Yachts was down to 68 employees. In the first year, one-third of U.S. yacht-building companies stopped production, and according to a report by the congressional Joint Economic Committee, the industry lost 7,600 jobs. When it was over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and material. Ocean Yachts trimmed its workforce from 350 to 50. Egg Harbor Yachts went from 200 employees to five and later filed for bankruptcy. The U.S., which had been a net exporter of yachts, became a net importer as U.S. companies closed. Jobs shifted to companies in Europe and the Bahamas. The U.S. Treasury collected zero revenue from the sales driven overseas.

Back then, Congress told us that the luxury tax on boats, aircraft and jewelry would raise $31 million in revenue a year. Instead, the tax destroyed 330 jobs in jewelry manufacturing and 1,470 in the aircraft industry, in addition to the thousands destroyed in the yacht industry. Those job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. The net effect of the luxury tax was a loss of $7.6 million in fiscal 1991, which means Congress’ projection was off by $38.6 million. The Joint Economic Committee concluded that the value of jobs lost in just the first six months of the luxury tax was $159.6 million.”

Keep this in mind when you realize that Pres. Obama has called for a luxury tax on corporate jets, and remember that a goodly number of corporate jets are built in the United States (Gulfstream, Cessna). How many people will lose their jobs as a result? How much revenue will be generated? We've seen this movie before...the remake won't end differently.

Real Stimulus: Eliminate corporate income taxes

There is a common meme that corporations pay income taxes. This is simply false. First of all, some 2/3s of US corporations don't owe any taxes in any given year, since they aren't profitable enough to have positive tax rate. But more importantly, when a corporation does pay taxes, those taxes are simply a cost of doing business that is passed to consumers, workers, and shareholders.

Even the federal government agrees with this concept. The Congressional Budget Office produced a report "THE INCIDENCE OF THE CORPORATE INCOME TAX" in which it states

A corporation may write its check to the Internal Revenue Service for payment of the corporate income tax, but that money must come from somewhere: from reduced returns to investors in the company, lower wages to its workers, or higher prices that consumers pay for the products the company produces.

That report goes on to say:

Although economists are far from a consensus about exactly who bears how much of the burden of the corporate income tax, the existing studies highlight the significant types of economic mechanisms as well as the empirical estimates necessary for further quantifying the burdens. CBO's review of the studies yields the following conclusions:

• The short-term burden of the corporate tax probably falls on stockholders or investors in general, but may fall on some more than on others, because not all investments are taxed at the same rate.
• The long-term burden of corporate or dividend taxation is unlikely to rest fully on corporate equity, because it will remain there only if marginal investment is not affected by those taxes. Most economists believe that the corporate tax system has some effect on investment decisions.
• Most evidence from closed-economy, general-equilibrium models suggests that given reasonable parameters, the long-term incidence of the corporate tax falls on capital in general.
• In the context of international capital mobility, the burden of the corporate tax may be shifted onto immobile factors (such as labor or land), but only to the degree that the capital and outputs of different countries can be substituted.
• In the very long term, the burden is likely to be shifted in part to labor, if the corporate tax dampens capital accumulation.
• Most attempts to distribute the burden of corporate taxation have neglected the possible importance of effects on the relative prices of products.

Corporate income taxes account for about $250-$300B in annual revenue for the federal government. Compliance costs for business to determine how much tax they owe is also estimated at about $200-$300B annually. In other words, it costs corporations almost as much slightly more to determine how much they owe as they actually owe. Then there is the inordinate amount of effort that goes into determining how to run the business when various tax considerations come into play instead of simply doing what's best for the business for business reasons rather than tax reasons. For example, should we buy a new truck this year, or build new factory, or hire a 50th employee. Each action can have tax implications that may have a greater influence on decisions made than does the business implications. And virtually all of these taxes and compliance costs get passed on directly to consumers/labor/shareholders.

The federal corporate statutory tax rate is 35%, one of the highest in the world, and the United States is the only country that seeks to double-tax income of multinationals. The rate and the related policies are often cited by businesses when they defend their decisions to off-shore production and jobs or structure their business to legally avoid US taxes (including keeping some $1T overseas rather than face the US taxes if they repatriated the income).

Almost every bit of "corporate welfare" comes in the form of special tax breaks which allow favored industries or even favored companies to avoid some part of the corporate tax code. Also note that a large portion of the potentially corruptive influence on Congress comes in the form of corporate lobbyists trying to "rent-seek" by getting tax provisions passed which benefit their clients.

Given the above, my position involves completely eliminating the federal corporate income tax.

This accomplishes a number of things in one fell swoop. It ends the vast majority of corporate welfare (which usually takes the form of preferential tax treatment). It unburdens the economy of the US relative to the rest of the world, since 0% is a lot less than 10, 20 or 30, or 35%--certainly some multinationals will rush to move their HQs to the USA? It frees up some $300B/yr (more or less) in compliance costs that US companies spend each year just to figure out how to minimize their taxes. Removing the tax burden and compliance costs would make it more feasible for some, but not all, activities (and the jobs) that had been previously offshored to return here, i.e., those jobs which were *almost* but not quite worth keeping here.

The "cost" for this move would have an initial price tag of $250B/yr (more or less). This is the amount that the IRS collects from corporate taxes each year. However, since a large share of the $250B in corporate taxes not being paid and the $300B (more or less) not being spent in compliance costs will be returned to shareholders, they will pay income taxes on those dividends, and workers who might be given raises will pay taxes on those raises. In other words, recognizing that corporations pass on the cost of taxes, eliminating the corporate tax would largely just move the corporate profits into individuals pockets, where it would be taxed under the income tax code. Then there's the positive economic impact of corporations moving their HQs and some production back to this country, those relocated and rehired workers would be paying income taxes, too.

To further offset the "cost", we can eliminate the IRS workers (*), programs, etc. charged with collecting the corporate taxes in the in first place, but a better use would probably be to refocus them on collecting the nearly $300B/yr estimated to exist in the "tax gap" between personal income taxes owed and those actually paid. In other words, if we could simply collect the full amount of personal income taxes owed, it would completely offset the baseline of missing corporate income taxes (not including the offsetting elements I mentioned above).

(*) We'd have to include the cost of the UI we'd have to pay to the fired IRS workers, corporate tax accountants, etc. But I'm sure at least some of them could get jobs with the multinationals to help them figure out their foreign taxes?