Most Americans have it exactly backwards on corporate taxation

Commentary by James H. Shott

In March, ABC News’ Website reported that “The top tax bracket for U.S. corporations stands at 35 percent, one of the highest rates in the world. So how is it possible that a giant of American business, General Electric, paid nothing in federal taxes last year, even as it made billions in profit?” the story asked. And it then questioned if GE CEO, Jeffrey Immelt, should be advising the president on business.

The story continued, “GE's success at avoiding taxes is nothing short of extraordinary. The company … earned $14.2 billion in profits in 2010, but it paid not a penny in taxes because the bulk of those profits, some $9 billion, were offshore.”

ABC was unable to connect the dots between the U.S. corporate tax rate of 35 percent, which it noted is “one of the highest rates in the world,” and the fact that most of GE’s profits come from operations that the company owns outside the U.S. Indeed, GE is a major sore spot among those who believe that heavily taxing corporations actually makes sense, and who complain that some corporations pay little or no taxes.

Among countries with a lower corporate rate than the U.S. are Mexico, Canada, Chile and Ireland – 30, 29.5, 17, and 12.5 percent respectively. Only Japan, at 39.5 percent, has a higher rate than the U.S.

You might expect an organization like ABC News, that has both a staff of professionals and the obligation to provide Americans with accurate and relevant information, to understand the topics it covers, like business and taxes. But ABC and nearly all of the major media either do not understand the intricacies of business and taxation, or an honest discussion of those topics gets in the way of their agenda. It’s no wonder the American people don’t understand business and taxation, being continually misinformed by the American media.

Why do so many Americans think taxing business is a good thing? Is it the widely held idea that the owners of businesses that pay little or no tax are collecting “ill-gotten” gains? After all, we have exempted 51 percent of U.S. households from paying personal income tax, so where is the money to run the government going to come from if not from businesses?

Corporate taxation enthusiasts think corporations are greedy for wanting to pay less in taxes. But businesses have to keep expenses as low as possible in order to make a reasonable profit and keep their doors open, and taxes are one of the expenses they need to control, a big one.

Consider how tax rates affect a business. A company with $5 million of taxable income will pay $1,750,000 in the U.S. at 35 percent, but only $625,000 in Ireland at 12.5 percent. To businesses, Ireland’s lower rate looks pretty appealing, helping them keep expenses low, and saying in effect, “Move your company to Ireland. We’ll save you money.”

However, the main thing the “tax the corporations” folks don’t understand is that corporations don’t really pay taxes, an occasional theme here; they just write the check.

A U.S. Treasury research paper titled "A Review of the Evidence on the Incidence of the Corporate Income Tax" looked at three different studies on corporate taxation, and noted the following:

1. It is estimated that 61% of any additional corporate tax is passed on in lower wages in the short run, and around 100% in the long run.

2. Using cross-country panel data from the Luxembourg Income Study, it is estimated that a 10% increase in the corporate tax rate decreases annual gross wages by 7% percent.

3. The results in this paper suggest that corporate tax rates affect wage levels across countries, and that higher corporate taxes lead to lower wages. A 1% increase in corporate tax rates is associated with nearly a 1% drop in wage rates.

The paper concludes: “Corporations don't pay taxes, individuals pay taxes in their roles as shareholders, workers and consumers. Higher corporate taxes translate to lower dividends for shareholders, lower wages for workers and/or higher prices for consumers. According to the empirical evidence presented in this paper, it appears that a substantial burden of increases in corporate taxes fall on the workers employed by corporations. Higher corporate taxes = lower wages.”

Raising corporate taxes is a terrible idea, unless we want prices to remain high or get higher, or want wages to go down, and corporate dividends to be cut.

Put into the context of the on-going failing recovery, raising taxes on corporations, or even keeping the corporate tax rate near the top of world-wide rates will perpetuate the recent pitiful economic performance, not encourage businesses to expand and create jobs.

As the U.S. Treasury research paper noted, over-taxing business hurts workers, shareholders and consumers, and also damages the country by driving business activity to more business-friendly countries, killing jobs and lowering GDP.

Our government spends far too much money, and then punishes businesses and the most productive individuals with ridiculous tax rates to raise the money to pay the bills. It just doesn’t work, and the sooner that reality takes hold, the better for us all.

Cross-posted from Observations