Political disclosure: This author does not support either major political party. Current views are similar to this: ”At the moment, the GOP seems evil, the Dems seem like complete morons, and the public seems screwed.” Adjust your mental filter as needed before reading.
In US economic-related politics, the GOP says that taxing businesses slows economic growth. The Dems are worried about income inequality. Both don’t like the high unemployment and slow recovery, but differ as to how to fix it. This posts addresses these points.
The first thing we need to realize is that government taxes generally serve two purposes:
- Raise revenues for the government
- Discourage (usually) undesirable behavior
That’s it. They usually come with a ton of secondary effects that politicians either underestimated or (way more often) didn’t predict. Let’s ignore the raising revenues component for now as we can change the tax code to do just that after we’ve really identified what we want to encourage/discourage.
We always want a strong economy, and currently we want lower unemployment. That’s actually relatively simple to fix. Abolish corporate income taxes and the payroll tax. Completely. 0%. I know I just made a bunch enemies with that statement, but hear me out. First, the payroll tax. We want more hiring, not less. But taxes discourage the behavior that’s taxed. The payroll tax makes it more expensive to hire any and all workers. THAT’S DISCOURAGING THE BEHAVIOR THAT EVERYBODY WANTS (hiring more workers). Why are we continuing this practice?! And abolishing it for only a year or two doesn’t do much. Companies know that they’ll be paying the taxes for those additional workers in short order, so it’s either hire the new workers and go through the costs of training them, then probably firing them (and any potential legal costs with that) 12 months later, or just go about business as if the cut didn’t happen. How many jobs is this tax costing? Here’s my back-of-the-napkin quick math (I’m sure it’s not this simple)
Currently, I believe the payroll tax is something like 4.2%. Unemployment is 8.2%, or put another way, employment is at 91.8%. Top economists from all sides say that we want it somewhere around 95%. If the entire savings of the payroll tax went into more employees (which should drive up productivity and increase profits), that comes out to this:
91.8 (current employment) * 1.042 (increased by 4.2%) = 95.66% (4.34% unemployment)
That scenario solves the unemployment issue. My cynical mind thinks that it’s more likely for only 1/2 of the money to be spent on more employment and the other 1/2 pocketed, but that would still bring us to 93.72% (6.27% unemployment). Still a far sight better than the 8.2% we currently have.
Now to my much more controversial suggestion: eliminate all corporate income taxes. Follow me on this one. Many gigantic corporations aren’t paying much in taxes anyway. They hire top-notch accountants and tax attorneys to come up with legal (or uncatchable) ways of lowering their tax burden. Really, they’re just creating a bunch of work (and costs) to the IRS (and thus tax payers). But of the ones that do pay their “fair share,” it’s hurting their business. If 28% of their income goes straight to the government, that’s 28% that doesn’t go to R&D, more employees, better benefits, or to the business owners (shareholders). I’m sure many don’t care if the shareholders don’t get a dime, but I do. If they don’t, people stop investing in US companies. Or US companies move more and more operations out of the US. We want these companies spending more money on employees, R&D, and whatever else. And we want more money coming into the US for investment. AND we want more companies setting up their headquarters in the US. Let them set up shop here. That’s a bunch of new, white-collar jobs for Americans each time a company moves here (or starts here). Let the US be the tax haven for the world, not the Caymans nor the Seychelles nor Nevis nor anyone else. If we need to, we only give tax breaks to foreign companies with X% of their global jobs here, or a set nominal number of jobs.
Bring your jobs and investment to America, and we’ll reward you with no corporate income tax!
Now, this doesn’t address the Dems concern about income inequality. To that, I say, if we’re concerned about inequality of individual income, then tax that, not the corporations. Here’s the pitch to the rich: We’re raising your income taxes, but now we’re only taxing it once. As it is right now, income is taxed at the corporate level, then again at the individual level before business owners (shareholders included) actually get their money. The nominal values might be 28% and 35%, but taxed at both of those rates twice means an effective tax rate of 53.2%. Save them money by capping the the top income tax at 50%, and still increase the amount of revenue due to many more jobs.
Personally, I don’t think soaking the rich is the right way to go about things, but if that’s what we want to do, then let’s actually do *that* instead of hindering economic growth by taxing corporations so highly.