Francisco Alvarez Higareda

3 years ago
In discussions over scaling back the corporate tax rate, exacerbating inequality remains my guiding concern; in an era of staggering inequality in income as well as inter-generational wealth across demographics, simply emphasizing 'inefficiency' to the point of fetish is all the more misguided in my humble opinion. After all, according to the Congressional Budget Office, about 80% of corporate income is held by households in the top fifth of the income scale, & about 50% is held by the top-1% [1]. Unless we could replace it with higher taxes on those same households, I'm concerned that scrapping or just lowering the corporate tax rate would be conducive to increasing after-tax income inequality. It doesn't help that beyond the proverbial special interest loophole, folks aggressively look for ways to shelter their income (more precisely, they hire people to do that for them.) As it is, “pass-through” businesses like partnerships & S-corporations – which are not subject to an entity-level corporate tax – now generate roughly 60% of US business income & account for much of the post-1980 rise in the top-1% income share [2][3]. Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners [3]. There is a line of economic advice I keep in mind – "Don't tax companies in an effort to tax rich people" – but the rise of pass-through businesses raises doubts for me whether repealing a corporate tax would essentially turn a C-corp into a tax haven in itself compared to pass-through companies. [See note 4.] That poses the question whether Toder & Viard also seek to reincentivize businesses to incorporate specifically as C-corps in the United States rather than simply pursuing business through other forms (ie, S-corps). Furthermore, I wonder whether corporations – with decisions subject to agreggate will of corporate governance – are subject to the same kind of incentives to shelter money compared to individual investors. It may very well be that lowering the corporate tax rate in itself doesn't immediately open the floodgates of investment towards expanded production. After all, it is widely reported that America's largest companies collectively continue to hoard over $1 trillion in cash despite a recovering US economy.

More to the specifics of Toder & Viard's proposal:

+ The authors claim that their "plan would also address cross-border transactions, effects on state & local governments, & other issues." > How so?

+ "Shareholders would pay tax on their accrued capital gains as the stock rose in value, even if they had not sold their shares. Shareholders would deduct accrued capital losses as the stock fell in value, even if they had not sold their shares." > Is the deduction necessarily the inverse of a capital gains tax? Does this deduction actually serve to encourage continued investment by safeguarding investors from volatility or is it just socializing losses for investments that would happen regardless? Also, it is just me or is it unclear whether only the year-to-year differential is deductible vs the full value of the stock is deductible?

+ "American shareholders of publicly-traded companies would be taxed on their dividends & capital gains at full ordinary income tax rates, up to 39.6%, rather than today's 20% top capital gains tax rate. The 3.8% net-investment-income tax would also continue to apply to dividends & capital gains." > Well done! I think this starts to speak to my concern about income inequality.

+ Toder & Viard do address tax avoidance: "Although there would no longer be a corporate income tax, corporate profits could not be sheltered from tax by being reinvested & shareholders delaying selling their stock. Reinvested profits would show up in accrued capital gains, which would be taxed each year, even if shareholders held onto their stocks for an extended period."

I also found compelling the line of reasoning that "corporations financed by debt pay lower effective tax rates than those financed by equity because they can deduct interest expenses. This unequal tax treatment penalizes equity-financed corporations & encourages companies to raise their debt levels, increasing their financial vulnerability." Addressing this reality of traditional corporate finance seems like a step towards a more resilient financial system in general.

All in all, it is clear that the US has higher *statutory* corporate tax rates than other developed countries but kudos to Toder & Viard for suggesting alternatives as well as incremental intermediate policy changes towards phasing out the corporate tax rate rather than simply calling for an outright repeal or reduction in that rate.

[1] https://www.cbo.gov/publication/44604
[2] http://taxfoundation.org/blog/us-corporate-tax-revenue-low-because-high-taxes-have-shrunk-corporate-sector
[3] http://www.nber.org/papers/w21651
[4] It would be a mistake to completely conflate pass-through businesses with small businesses. Pass-through businesses are generally smaller than C-Corps, but pass-through businesses are not always small businesses. While most pass-through employment is either self-employment or at small firms with 1-100 employees, 27.5% of pass-through employment was at firms with more than 100 employees & 15.9% at large firms with 500+ employees. Source: http://taxfoundation.org/article/overview-pass-through-businesses-united-states
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Francisco hasn't commented yet.

3 years ago
In discussions over scaling back the corporate tax rate, exacerbating inequality remains my guiding concern; in an era of staggering inequality in income as well as inter-generational wealth across demographics, simply emphasizing 'inefficiency' to the point of fetish is all the more misguided in my humble opinion. After all, according to the Congressional Budget Office, about 80% of corporate income is held by households in the top fifth of the income scale, & about 50% is held by the top-1% [1]. Unless we could replace it with higher taxes on those same households, I'm concerned that scrapping or just lowering the corporate tax rate would be conducive to increasing after-tax income inequality. It doesn't help that beyond the proverbial special interest loophole, folks aggressively look for ways to shelter their income (more precisely, they hire people to do that for them.) As it is, “pass-through” businesses like partnerships & S-corporations – which are not subject to an entity-level corporate tax – now generate roughly 60% of US business income & account for much of the post-1980 rise in the top-1% income share [2][3]. Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners [3]. There is a line of economic advice I keep in mind – "Don't tax companies in an effort to tax rich people" – but the rise of pass-through businesses raises doubts for me whether repealing a corporate tax would essentially turn a C-corp into a tax haven in itself compared to pass-through companies. [See note 4.] That poses the question whether Toder & Viard also seek to reincentivize businesses to incorporate specifically as C-corps in the United States rather than simply pursuing business through other forms (ie, S-corps). Furthermore, I wonder whether corporations – with decisions subject to agreggate will of corporate governance – are subject to the same kind of incentives to shelter money compared to individual investors. It may very well be that lowering the corporate tax rate in itself doesn't immediately open the floodgates of investment towards expanded production. After all, it is widely reported that America's largest companies collectively continue to hoard over $1 trillion in cash despite a recovering US economy.

More to the specifics of Toder & Viard's proposal:

+ The authors claim that their "plan would also address cross-border transactions, effects on state & local governments, & other issues." > How so?

+ "Shareholders would pay tax on their accrued capital gains as the stock rose in value, even if they had not sold their shares. Shareholders would deduct accrued capital losses as the stock fell in value, even if they had not sold their shares." > Is the deduction necessarily the inverse of a capital gains tax? Does this deduction actually serve to encourage continued investment by safeguarding investors from volatility or is it just socializing losses for investments that would happen regardless? Also, it is just me or is it unclear whether only the year-to-year differential is deductible vs the full value of the stock is deductible?

+ "American shareholders of publicly-traded companies would be taxed on their dividends & capital gains at full ordinary income tax rates, up to 39.6%, rather than today's 20% top capital gains tax rate. The 3.8% net-investment-income tax would also continue to apply to dividends & capital gains." > Well done! I think this starts to speak to my concern about income inequality.

+ Toder & Viard do address tax avoidance: "Although there would no longer be a corporate income tax, corporate profits could not be sheltered from tax by being reinvested & shareholders delaying selling their stock. Reinvested profits would show up in accrued capital gains, which would be taxed each year, even if shareholders held onto their stocks for an extended period."

I also found compelling the line of reasoning that "corporations financed by debt pay lower effective tax rates than those financed by equity because they can deduct interest expenses. This unequal tax treatment penalizes equity-financed corporations & encourages companies to raise their debt levels, increasing their financial vulnerability." Addressing this reality of traditional corporate finance seems like a step towards a more resilient financial system in general.

All in all, it is clear that the US has higher *statutory* corporate tax rates than other developed countries but kudos to Toder & Viard for suggesting alternatives as well as incremental intermediate policy changes towards phasing out the corporate tax rate rather than simply calling for an outright repeal or reduction in that rate.

[1] https://www.cbo.gov/publication/44604
[2] http://taxfoundation.org/blog/us-corporate-tax-revenue-low-because-high-taxes-have-shrunk-corporate-sector
[3] http://www.nber.org/papers/w21651
[4] It would be a mistake to completely conflate pass-through businesses with small businesses. Pass-through businesses are generally smaller than C-Corps, but pass-through businesses are not always small businesses. While most pass-through employment is either self-employment or at small firms with 1-100 employees, 27.5% of pass-through employment was at firms with more than 100 employees & 15.9% at large firms with 500+ employees. Source: http://taxfoundation.org/article/overview-pass-through-businesses-united-states
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