The career-politician class and bureaucrats seek civil-service jobs with security, stability and assured life tenure. Further, they tend to be envious of risk takers and, through isolation, are a growing part of an economically ignorant electorate. Politicians and bureaucrats have a bias that is anti-free-market and anti-business. Believe me – I’ve been watching them for about 50 years and know what they smell like when they create problems and then campaign against those same issues. Tax rates are a nice example of this problem.
Think for a moment about a common complaint that industry is outsourcing jobs. Could it be that the excesses of labor-union contracts and high U.S. taxes are killing industry? Our corporate taxes are the second highest among OECD (Organization for Economic Cooperation and Development) nations with a 35% federal burden and an average added state tax load of 4.3%, equaling 39.3%. Only Japan has a higher rate at 39.5%. The OECD average is 28.7%. For comparison, China is 25%. And the trend is toward reduction – Canada is reducing rates to 15% and France to 25%. As best I can learn, U.S. state taxes range up to 9.99% (Pennsylvania) and are the highest in states that are losing the most jobs (Ohio, New Jersey, California, Minnesota, Michigan). Only three states have no corporate income tax (Nevada, Washington, Wyoming). Local taxes are in addition!
When politicians talk about “tax equity” and “tax cuts for the rich,” they appeal to Joe Six-Pack, whose economic acumen is zero – to match the politicians. And when they enact higher tax rates on businesses, they drive investment capital offshore and encourage foreign industrial activity as replacement for the American loss.
Indeed, corporations ultimately do not pay any tax because they serve only as collection agents and pass along the costs of doing business to the consumers and the diminishing employee base, seeking to heighten shareholder return by moving to a more favorable business climate. No wonder there is a shift of jobs and investment out of high-tax industrial nations – with the U.S. as the number-one leader, all arranged by political dummies.
In a more general sense, a flat tax that eliminates deductions and credits in the corporate tax code would be far superior to the current method. This was suggested in the 2005 report by the President’s Advisory Panel on Federal Tax Reform, which urged reduced complexity, removal of incentives that distort economic investment for tax rather than productive economic purposes and improved integration of business and personal taxes.
Of course since this report was issued under a Bush White House tenure, those on the left in Congress disparage the effort on that basis alone. Separately, the U.S. Treasury issued a July 2007 report, “Business Taxation and Global Competitiveness,” covering many distortions, including double taxation on corporate income, failing to adjust depreciation deductions for inflation and disparity in treatment of tangible versus intangible assets. Taxes on human capital are more favorable than on physical capital.
Current industrial conditions are heading in the wrong direction. For this calamity to continue exacerbates the national long-term problems in so many ways. Corporate tax rates are probably as big a matter to correct as any single item in the economy. America cannot continue to have selfish, dull-witted and inexperienced politicians blunder away the American dream and its wonderful past achievements. IH