This commentary focuses on Rana Foroohar's essay, "The Artful Dodgers". This is a rather polemical, predictable, petty, leftist rant that engages in corporation-bashing and in particular the hot topic of corporate inversions, whereby a corporation under certain circumstances can merge with foreign corporation with the merged corporation being based in the foreign company's home country. In essence, Foroohar is pointing out that corporate taxes as a share of federal revenues have reduced as a percentage. She tries to point the blame on generous tax loopholes over the years, then resurrects a variation of Obama's phony "economic patriotism", arguing corporations are using inversions to get away from paying their "fair share", that the statutory record high tax bracket is a red herring because nobody pays it. YAWN! Been there, done that...
Before going into conversions, let's point out that corporations are owned by individuals, and individuals are also taxed on distributions (imagine if the corporate rate exceeds your own income rate, never mind paying a tax on those distributions). This double taxation is a major reason for chapter-S corporations, which are taxed at the owner's personal rate (so guess what happens when individual rates go up?) So let us understand there's a bit of a shell game going on, with business income recharacterized as individual income. There are also some accounting changes, which Foroohar argues are "loopholes"--in particular, depreciation. To encourage investment, the government might allow accelerated vs. straight-line depreciation; this has the effect to push expenses to the early years, which would lower taxable income and thus taxes (although this effect should wash out in the long run). There are nuances and complexities, of course: one thing that the Tax Foundation points out is that tax revenues tend to vary with the business cycle.
Progressive tax rates do make a difference, because they punish the company for being "too successful". They add to costs for producing the n+1 widget; as a producer, I can reduce costs by shifting production to another state or country with lower government costs (holding other costs constant). Tax rates do have an inverse relationship with tax base; standard law of supply and demand: you raise the price, you sell fewer widgets.
One soundbite that grabbed my attention was the variation of Obama/Warren's trite "you didn't build that" socialist nonsense:
This strikes many as grossly unfair, particularly given that taxpayer-funded, early-stage investments in areas like the Internet, transportation and health care research are the reason many of the largest U.S. companies got so big and successful to begin with. That’s a leg up–call it corporate welfare...Do we really want to trot out the ludicrous notion that the government "invented" the Internet? (As an MIS academic, I have to roll my eyes at this propaganda). Let's quote the WSJ:
It's an urban legend that the government launched the Internet. The myth is that the Pentagon created the Internet to keep its communications lines up even in a nuclear strike. In a 1946 article in The Atlantic titled "As We May Think," [Vannevar] Bush defined an ambitious peacetime goal for technologists: Build what he called a "memex" through which "wholly new forms of encyclopedias will appear, ready made with a mesh of associative trails running through them, ready to be dropped into the memex and there amplified." ,,,By the 1960s technologists were trying to connect separate physical communications networks into one global network—a "world-wide web." The federal government was involved, modestly, via the Pentagon's Advanced Research Projects Agency Network.Robert Taylor, who ran the ARPA program in the 1960s, sent an email to fellow technologists in 2004 setting the record straight: "The creation of the Arpanet was not motivated by considerations of war. The Arpanet was not an Internet. An Internet is a connection between two or more computer networks." Vinton Cerf developed the TCP/IP protocol, the Internet's backbone, and Tim Berners-Lee gets credit for hyperlinks. But full credit goes to the company where Mr. Taylor worked after leaving ARPA: Xerox. As for the government's role, the Internet was fully privatized in 1995, when a remaining piece of the network run by the National Science Foundation was closed—just as the commercial Web began to boom. Blogger Brian Carnell wrote in 1999: "The Internet, in fact, reaffirms the basic free market critique of large government. Here for 30 years the government had an immensely useful protocol for transferring information, TCP/IP, but it languished. . . . In less than a decade, private concerns have taken that protocol.John Stossel adds:
Why didn't the private sector develop an Arpanet? According to Andrew Morriss of The Freeman, two reasons: First, government crowded out the private sector by hiring many talented computer scientists. Second, laws required the FCC to authorize new networks, and "Regulatory barriers to entry, not a lack of entrepreneurial activity, slowed the efforts to build private networks."...Peter Klein, of the Ludwig von Mises Institute, points out that most of the internet went "unforeseen by its original designers - [but was] developed in the private sector." For example, Xerox and Apple developed "a useable graphical user interface (GUI), a lightweight and durable mouse, and the Ethernet protocol."Now let's take the nonsense of the interstate highway system:
Before the federal government began financing highways in the 20th century, that role was assumed by state governments and the private sector. Private turnpike companies built thousands of miles of toll roads across the states during the 18th and 19th centuries. The first private turnpike connected Philadelphia and Lancaster in 1794 and, by 1800, 69 turnpike companies had been chartered in New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Virginia, and Maryland.3 The movement continued throughout the 19th century, with many toll roads created in the mining states of Colorado, Nevada, and California. The financing of turnpike companies was entirely voluntary, except in Ohio, Pennsylvania, and Virginia where some state subsidization occurred...Over time, the road companies adapted to changes in transportation modes, often becoming spokes and feeders to the spreading rail lines. The railroads themselves faced a rising challenge from automobiles in the 20th century. Unfortunately, rather than encouraging the revival of private toll roads for automobiles, politicians of the era favored abolishing the private ownership of roads and substituting state-owned "free" roads financed by taxes. The roads of the 20th century were virtually all government roads provided outside of the market system.Gary Galles has some nice final reflections on the "you didn't build that" populist garbage;
Most ominous is President Obama's mistaken equation of society and government...society and government are very different, and in many ways, "the interests of the state and the interests of society … are directly opposed," as Albert Jay Nock wrote. First of all, only a very small part of what government does can be justified as making our voluntary social arrangements work better, advancing the general welfare. But that can only justify very low and commonly borne taxes. And we do not owe government more just because they took over a function that does not require their intervention, particularly since it hamstrings more than it advances the quality of education. Government, with its massive inefficiencies, also vastly overcharges citizens for their services, as demonstrated in study after study. Roads and bridges are prime examples, due to pork-barrel earmarks, prevailing wage rules, union restrictions, project labor agreements, environmental extortion, buy-local restrictions, and more. Such inefficiency cannot justify making "successful" people pay more to make up for overcharging us for what we could do more cheaply and voluntarily, Many of the metastasizing alphabet soup of regulatory agencies, such as the EPA, fit this mold, as do price controls (for example, minimum-wage laws), many labor and zoning laws, occupational-licensing requirements, Every dollar the government takes, it takes from others. But in patting itself on the back for the few things it does tolerably well, it ignores the wonders individuals could have worked with the resources taken away to fund all that the government does. In addition, taxation distorts people's incentives, which imposes further costs on society. Albert Jay Nock observed long ago: It is a curious anomaly. State power has an unbroken record of inability to do anything efficiently, economically, disinterestedly or honestly; yet when the slightest dissatisfaction arises over any exercise of social power, the aid of the agent least qualified to give aid is immediately called for.Finally, I've already commented on inversions several times in my FB Corner segments, but let's review the basic concept because Foroohar is bashing corporations for inversions as just ungrateful corporate greed run amok--in reality, the Statist political whores are simply looking for more pockets to legally plunder (as if the Spendthrift-in-Chief hasn't spent a world record number of dollars while adding $7T to the unsustainable federal deficit and climbing). Did you heard her discuss the distinction between territorial and worldwide tax systems? Of course not.
From Lift America Coalition;
| Territorial Systems | Transition Since 2000 | Worldwide Systems | Top Marginal Tax Rate |
|---|---|---|---|
| Australia | Chile | 20% | |
| Austria | Greece | 20% | |
| Belgium | Ireland | 12.5% | |
| Canada | Israel | 24% | |
| Czech Republic | 2004 | Korea | 24.2% |
| Denmark | Mexico | 30% | |
| Estonia | 2005 | United States | 39.2% |
| Finland | |||
| France | |||
| Germany | |||
| Greece | |||
| Hungary | |||
| Iceland | 2003 | ||
| Italy | |||
| Japan | 2009 | ||
| Luxembourg | |||
| Netherlands | |||
| New Zealand | 2009 | ||
| Norway | 2004 | ||
| Poland | 2007 | ||
| Portugal | |||
| Slovak Republic | 2004 | ||
| Slovenia | |||
| Spain | |||
| Sweden | |||
| Switzerland | |||
| Turkey | 2005 | ||
| United Kingdom | 2009 |
Territorial tax systems mean you are taxed in each state and only in that state for the income generated in that state. This is different than a worldwide tax system where the government wants to take a share of all profits regardless of where it's earned. Assuming you can credit foreign income tax, this means that the US government thinks it has a right to the difference as if your foreign plant was operating in the US--EVEN THOUGH IT PROVIDES NO SERVICES FOR THAT OPERATION. Given the fact that the US has the highest, most noncompetitive business tax rates among the major economies, the political whores in Washington think they are entitled to that money. As the chart clearly shows, most of the other countries NOT ONLY HAVE LOWER TAXES THAN THE US, THEY DON'T ASSESS TAXES ON FOREIGN INCOME FROM CORPORATIONS OUTSIDE THEIR HOME BASE. Even in the context of the diminishing number of countries still clinging to an obsolete, noncompetitive corporate tax system.
Let's be clear because Foroohar isn't; when Burger King inverted during the merger with Tim Horton, its US-based income and taxes are unaffected by the merger. What it gains is that US no longer gets to plunder income from foreign operations.
Finally, authentic tax reform means (1) discarding its obsolete and counterproductive worldwide tax system and (2) eliminating or at least simplifying/lowering/flattening its corporate tax rate (say, to 20%). It's unconscionable we haven't seen competitive tax reform under 3 straight Presidents.
