Yellen has the precise thought, however the flawed tax plan

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Yellen has the right idea, but the wrong tax plan

Treasury Secretary Janet Yellen leads the Made in America Tax Plan, which includes an increase in the federal corporate tax rate from 21% to 28%. Combined with state and local corporate taxes, the OECD calculates that the effective statutory tax rate is currently 25.77%. Adding 7% to this would probably increase the total to 32.77%, which would only beat France (32.02%) for the title: highest corporate tax rate in the OECD.

The current corporate tax rate for Spain is 25%; Great Britain, 19%; Sweden 21.40%; Switzerland 21.15%; Poland, 19%; Ireland 12.5%; Hungary 9%.

Taxes in Europe are high. However, these are mostly broad, flat wage and consumption taxes. They are way too high. Taxes on capital and companies are generally lower in Europe than in the US. This is one reason why the economic situation in Europe is not as bad as some expect, even with high overall taxes.

Corporate tax rates have fallen in developed countries.

Tax foundation

“[A]Although US companies are the most profitable in the world, the US has less corporate tax revenue as a percentage of GDP than almost any advanced economy in the Organization for Economic Co-operation and Development (OECD). “Complains the Treasury Department on the first page of its attempt to justify a higher corporate tax rate.

This is the natural result of decades of very high taxes in the United States. Corporations found long ago that they can pay lobbyists to pressure Congress to add endless deductions and exemptions, avoiding taxes that are really too high. The result of all this, after decades, is that tax revenues as a percentage of GDP have been very low. High tax rates lead to low income. This is a pattern we’ve spotted time and again throughout history, as I described in The Magic Formula (2019). We should have learned that now.

In the rest of the world, lower corporate tax rates went hand in hand with higher revenues as a percentage of GDP. It is likely that these lower tax rates have been accompanied by a tax simplification or the reduction and elimination of the various methods that companies have (rightly) used to try to avoid previous tax rates that were far too high. The UK had more tax revenue (2.49% of GDP) in 2019 with a tax rate of 19% than in 1978 (2.19%) with a tax rate of 52%. The UK also has more than the US in 2016 (1.95%) when the combined US rate was 38.92%.

These countries not only benefited from higher tax revenues / GDP. As a result, GDP has likely increased as well, as lower tax rates tend to lead to a healthier economy. As more people are employed at higher wages in a healthier economy, not only will corporate tax revenues increase, but tax revenues from all sources will also increase. The pressure to increase social spending is also decreasing. More income and less expenditure. Europe demonstrated this to a large extent in 2013-2014, when lower tax rates across the continent contributed to economic recovery, higher tax revenues and lower deficits.

Tax revenue chart

Lower tax rates have led to higher tax revenues / GDP in developed countries.

OECD

President Trump took a giant step towards remedying this situation when he spearheaded the 2017 corporate tax cut, which lowered the federal tax rate from 35% to 21%. However, the existing deductions and exemptions have not been significantly reformed. The result was a drop in sales. That wasn’t such a bad thing. Those companies that did not pay a lot of taxes before 2017 and made use of an overly complicated tax law did not pay much afterwards. The difference was in the companies that faced paying the full rate. They enjoyed a great advantage. There’s nothing wrong with that. Healthy businesses lead to healthy economies. That is why the UK tax rate is only 19%.

But it was only half a reform. There should have been some steps to remove excessive deductions and exemptions and broaden the tax base.

The result of all this is the persistent impression that many companies are paying less tax than they should – zero or almost zero in many cases. One of the consequences of this is that preference is given to old, established companies that have campaigned for tax advantages for decades. Young companies end up paying the high statutory rates. The result is that innovative, high-growth companies are unnaturally suppressed. (Old, established companies that don’t pay a lot of taxes, in fact.) The remedy for this is not a higher tax rate, but a reform of tax legislation that eliminates the resulting exemptions and deductions as the inevitable result of excessively high tax rates.

The natural implication of these strategies is a flat tax. This would have the lowest possible rate on the broadest possible basis. Generally this is known as the “VAT base”, which is used to tax profits before interest payments. This would remove a highly distorting element of current tax legislation that unnaturally encourages leverage rather than equity. The result is that companies tend to be overly indebted and therefore prone to bankruptcy. This has also led to the rise of the leveraged buyout private equity industry, which were balance sheet tricks that neither companies nor employees benefit. Another aspect of the “VAT base” is that business investments are effectively recognized as an expense in the first year. This is a great incentive for more investment, which means more jobs and higher wages. However, since there would be no depreciation, taxes would be higher later. The bottom line is more investment, more jobs, and higher taxes paid on the profits of these new investments. It’s a winner.

We have been discussing Flat Taxes and FairTaxes since the 1980s. But some countries actually did. One of them is the former communist Bulgaria, which introduced a flat tax of 10% in 2009. The tax revenue / GDP from the 10% flat tax was 2.24% of GDP in 2016, higher than the US with an effective tax rate of almost 39% and higher than Bulgaria in 2000 when the rate was 40%.

In the 2016 election, Donald Trump proposed a corporate tax rate of 15%. This would make the United States one of the most business-friendly places in the world. If Yellen and Biden really wanted to solve the problem of low tax revenues / GDP today, and many companies were using tax loopholes to avoid paying taxes at all, they would not only accept Trump’s 15% proposal, but combine it with a blanket reform of corporate tax law according to the principles of the flat tax.

All the evidence we have today from around the world suggests that this tax reform, a flat rate tax at a tax rate of 15%, would bring in more revenue / GDP than the US did before 2017, when the combined tax rate was close to 39%. This would eliminate the huge differences where some companies pay taxes that are really too high and some highly profitable companies pay almost no taxes at all.

But the fun wouldn’t stop there. Since the US is the best place in the world to do business, more business is done there. With higher wages, more capital is invested and more jobs are created. This would increase tax revenues across the board, including personal income taxes, wage taxes, and sales taxes. I called this the “spiral of success”.

With the US all competing, Yellen would soon give up her speech on “global tax harmonization”. The US is not interested in “harmonizing” with socialist Europe. (Or have them “harmonize” with higher tax rates in the US) We’re interested in eating their lunch.

I know all of this now seems to be so much fantasy that left-wing elements appear to be in control of the US government – not just now, but through continued election rigging for the foreseeable future. The debate about up and down tax rates, as we have done endlessly for the past seventy years, may not seem very relevant. We wonder whether a constitutional republic still exists or whether the US will be part of a globalist “Great Reset” that will end in a dark serfdom of the Hunger Games, sprinkled with “Green New Deal” propaganda.

However, this could present an opportunity to actually make such big changes. Japan’s Asian Empire dreams died in 1945; but then they had to come up with something new. It worked! We should have a good idea of ​​what we want because at some point we might have a chance to get it. It seems like we’ve spent decades discussing these intricacies of things that never happen. But sometimes things happen. Then you won’t have decades to talk about the intricacies. You have to act quickly – according to beliefs that you have developed over the years.

Not only that, but the belief that things could be better – not just “better” in a vague sense, but in a specific way – drives people out of apathy. It makes them more than just simple sheep to be herded.