Tax Policies and Legislative Tax Reform
Corporate taxes as a part of federal revenue were 27.3% in 1955 but 8.9% in 2010. Over the same period, corporate tax as part of GDP dropped from 4.3 to 1.3%. Add to this the facts that “S” and “LLC” corporations did not exist until a few decades ago and that tax codes and regulations grew over this same period from 1.4 to 9.1 million pages in federal regulations, institutionalizing new and varied “loopholes.” The percentage of general-fund tax collections from corporate taxes dropped from 33% in 1940 to 16% in 2011, while personal tax collections have risen from 44% to 76% over the same period. This article addresses federal corporate tax laws and processes, which warrant a dramatic overhaul and reduction to make American industry healthy and vibrant again.
The purpose of taxation is to provide money for government spending without creating monetary inflation. Spending covers roads and schools, national defense, law enforcement and a court system, for example. It is only in the past 60 years or so that taxes have been devoted to ends like social welfare, sponsoring the arts or subsidizing political interests such as farmers, labor unions or inefficient industrial enterprises. It must not be forgotten that costs of compliance with taxation are not trivial, making the effective tax rate much higher than stated rates – from 14 to 52% higher, in fact, and averaging 44% more for all payers – the “deadweight costs” of taxation.
Further, think of all the types of business taxes, regardless of your status as a corporation or a sole proprietor. There are social-security contributions, unemployment, property, transfer, value-added, excise, sales, tariff, license, ad valorem, consumption and environmental taxes, just to name a few. The current Administration believes that business taxation is justified on the basis of commercial activity necessity and use of established infrastructure. Other economists, one like Walter Williams of George Mason University, say: “Government income-redistribution programs produce the same result as theft. In fact, that is what a thief does; he redistributes income. The difference … is mostly a matter of legality.” It must be recognized and admitted that tax laws in developed economies provide perverse incentives for tax avoidance.
Official Federal corporate tax rates vary from 15 to 35%. Revenues constituted 9% of all federal tax collections, and 1.3% of GDP were attributed to corporate taxes in 2010. As we review U.S. history over the last half century, we see that tax policy and law has a dramatic impact on health of the economy, industry, political stability and citizen satisfaction. People talk about the Laffer Curve and either approve or not. It was Arthur Laffer, in the early years of the Reagan Administration, who predicted that “excessive tax rates actually reduce potential tax revenues by lowering the incentives to produce.” His model also predicts that “insufficient tax rates lead directly to a reduction in tax revenues.”
During Reagan and all subsequent presidencies, policies and laws by Congress (and never forget that there is one, and only one, origin of tax law – our legislative branch of government) have skewed the tax codes with loopholes, preferences and exceptions that make a mockery of common sense. As Laffer said, and is rarely acknowledged, “taxable income will change in response to changes in rate of taxation” and that increasing tax rates beyond a certain point is counterproductive for raising tax revenues. It is quite evident to any thoughtful person that what Laffer said is correct and that the problem is squarely on Congress for gaming the system in terms of how “taxable corporate income” is defined. The same holds true for all others who pay taxes, including individuals and institutions.
History is a good instructor here. In 1981, maximum tax rates were significantly reduced – the top marginal rate was reduced from 70 to 50% and down to 28% in 1986. Deficits fell from 6 to 3.2% of GDP (concurrently, spending fell from 4 to 2.5%). Business health and investment surged, so unemployment fell from 7% in 1980 to 4.8% in 1988. Over the same period, inflation declined from 10 to 4%.
Economist Milton Friedman said about these results: “Reaganomics had four simple principles: lower marginal tax rates, less regulation, restrained government spending and non-inflationary monetary policy.”
It’s simple. It worked then, and it will work now. IH