Goerge Bush, that is:
IRS audits and penalties have fallen, especially for corporations, laments Business Finance Magazine.The result has been a reduction in the effective corporate tax rate from 26% to 20%. The author, Fay Hansen, complains that this is “substantially below the rates for other advanced nations”.
Strange. Does Ms. Hansen think that her readers, ostensibly financial executives, would join her in her sorrow over lower taxes?
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There is every reason to believe that swings in the effective tax rate will lead to malinvestment as surely as swings in the money supply or interest rates caused by non-economic actors. Lower effective tax rates encourage realizing profits. However, given our political system, there is every reason to believe that the rates will go up. I fully expect to learn that businesses have been taking profits as quickly as possible; more quickly than warranted. The money is going to be put somewhere, whether it went into the accounts of the businesses or found its way to shareholders. It will get invested somewhere else. This is taking money out of successful investments.
A rush to realize profits is going to make more than a few quarterly reports look very good. That in turn degrades the quality of the information that is available to investors. The very money that gets pulled from successful ventures will be chasing other opportunities at a time when the quality of the information for finding them is distorted.
I don’t for a minute believe that higher taxes are good. A lower tax rate is clearly desirable. But temporary lowering of the tax rate brings with it a different set of problems than a constant, high rate. Both are demonstrably bad. Personally, I suspect that a fluctuating tax rate is the more harmful of the two.
Withheld, I don’t think I’d agree with you on that.
Take the extreme case:
A constant tax of 100% v. a fluctuating tax from 0% to 1%. It should be obvious that the first is the worse scenario.
That’s not saying that fluctuating taxes don’t bring the problems you claim (though it rests largely on the expectation that taxes will rise again, which isn’t necessarily true, though it tends to be). But, I say that even temporarily lower taxes means fewer resources in the hands of the State than constant high ones in the long run. Because of that, I prefer it despite the potential malinvestments (after all, isn’t basically every government owned resource a malinvestment?).
Maybe Ms. Hansen and the magazine’s editors are attempting to educate U.S. corporate executives as to how “good” they really have it. Or maybe the implication is that the Bush administration has been very generous with regards to corporate tax breaks, at the expense of America’s “working families.” You know, there is a presidential election in November.
I assume by “other advanced nations” Ms. Hansen is referring to the wonderful social democracies/entitlement states of Western and Central Europe. Why should we hold up as a positive example the supposedly higher corporate taxes of these countries? It is a sign of the intellectual bankruptcy of the media and for that matter our so-called educational system when high taxes, i.e., legalized theft, are considered a worthy accomplishment. In addition, comments such as Ms. Hansen’s indicate of a major lack of understanding as to how wealth is created, as I’m sure readers of Mises Economics Blog realize. Does Ms. Hansen not understand that the European entitlement states, which are even more interventionist than the U.S., are generally experiencing worse economic problems than the U.S., just as sound economic analysis would conclude?
You are right, Dennis, it does cause one to question the author’s understanding of economics. I can only imagine trying to tell her that corporations do not – in fact, can not – pay taxes anyway.
This woman is just another cheerleader for the feds.
I found this statement quite amusing:
“Although corporate executives complain bitterly about the U.S. corporate tax burden, the effective tax rate for U.S. companies is now substantially below the rates for other advanced nations.”
In other words, we shouldn’t complain because our government only extracts 40% of our GDP compared to France’s 50%. On that token I guess that relatives of people accross the globe who have been murdered by the state shouldn’t complain because Germany’s (an “advanced” nation) murder rate was much higher.
I mostly argree with steven, but remember Godwin’s Law!(Link).
In Asia, the region where Economic growth is highest, there is virtually no Taxation for corporations.
Isn’t that where pollies are worried about American going?
Lucas,
You’re right. My comments were brief and off-the-cuff. A fluxuating, but low tax rate is less harmful than a very high tax rate. Of course, I wouldn’t consider 0-1% to be much of a change. I was talking about a tax rate that swings over at least several percentage points. Also, because that generally involves changing tax policies, the swings for some companies are going to be much wider than the average.
The harmfulness of the changing tax rate and policies comes from something I believe most of us understand here. It is about managing risk. The response to politically generated risk is fundamentally different than the response to other risks in business. It leads to malinvestment in lobbying and tax strategies. It is fairly obvious that those are just another instance of regulatory capture.
Andrew, I wouldn’t go so far as to say there are virtually no corporate taxes in Asia, though they are lower.
Here is a post of mine from last month. Japan actually has a higher rate (42% vs. 40%) than the US. Most other Asian nations are in the 20s or low 30s. Of course, various deductions and credits can distort the picture.
Very true, Withheld,
You’re right, lobbying is something I wasn’t taking into account. So, as I’m sure we’d agree, the real question is: how many resources do government officials pull out of the system?
Based on that, it’s very possible that a guaranteed unchangeable rate of 35% (meaning no lobbying will be useful, so it’s not even tried) would actually pull fewer resources to the government than a system with a rate varying from 25% to 30% where lobbying has a significant impact on tax rates.
Jim,
Corporate tax rates are really higher in Japan? I’m sort of surprised! But they also have loads of protectionalism, and huge subsidies for industries such as construction, etc. all of which make an inefficient market.
For example, California rice tastes every bit as good as japanese rice and costs 1/10th the price. But can you get California rice in Japan? Of course not, selling California rice would better 125 million people at the the expense of the 10,000 or so rice farmers in Japan… and why would big government ever want to better the majority of people?
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