Lies, Damn Lies, And Taxes
Marc Chandler | Feb 15, 2017 12:15AM ET
President Trump hinted at the end of last week that the Administration's tax proposals would be aired in the next two or three weeks. This seems to be a signal of its inclusion in his address to both houses of Congress on February 28. This is not quite a State of the Union speech, but similar and precisely what Obama did in February 2009.
Taxes are complicated. Much of the discussion so far has been on the border adjustment, which is a tax on imports and a tax break for exports. If adopted it has far reaching implications, including but not limited to the potential challenge at the World Trade Organization and retaliatory action.
There has also been the suggestion to abolish the tax incentives for debt, which also have important implications for many businesses and the capital structure of corporations. It could also hit economic activity that is often funded by debt, such as private equity and mergers and acquisitions. There is also some discussion of how the global activity of multinational companies should be taxed.
Still, underlying much of the discussions is the belief that US corporate taxes are too high. Indeed, the margin Federal tax rates are 35%, and when state taxes are included, the marginal rates rises to 39.2%. The global average is near 25%. It is not a lie. Nor is it fake news. Nevertheless, it is grossly misleading.
Such claims focus on the statutory tax rate, not the effective tax rate, or what companies actually pay. The Congressional Research Service estimates that the average effective corporate tax rate is 27.1%, which is slightly below the OECD average of 27.7%.
Even this may overstate the case. Consider that the Citizens for Tax Justice found that General Electric Company (NYSE:GE), Boeing (NYSE:BA), Verizon Communications Inc (NYSE:VZ), and 23 other Fortune 500 companies paid no Federal taxes between 2008 and 2012. More than 100 of the profitable Fortune 500 companies paid no taxes in at least one year in that five-year period. The advocacy group found that 288 of profitable Fortune 500 companies paid an effective tax rate of 19.4% between 2008 and 2012.
Leaving aside the issue of how much taxes US corporations actually pay, if lower taxes boosted growth and/or employment they should be worth considering. However, this also does not look true. The Center for Effective Government found that 22 of the 30 profitable Fortune 500 companies that paid the highest corporate tax rate (30%+) in 2008-2012 increased payrolls by 200k. The 30 more profitable Fortune 500 companies that paid little or no taxes in that five-year period cut employment by a little more than 50k.
The impact of lower taxes on growth appears minimal at best. The Congressional Research Service estimates that a cut in the Federal tax schedule from 35% to 25% may boost growth by less than 0.2%. The reason why this may be so is that corporate tax rates are not the impediment to growth. As counter-intuitive as this may seem, US corporations and many large businesses around the world have more capital than they know what to do with. Isn't that what is meant when capital is returned to shareholders in the form of stock buybacks and dividend increases? This is the central subject of my new book, Political Economy of Tomorrow.
Get The News You Want
The implication of this is if the effective US corporate tax rate is reduced, it may be good for equity owners. The US political and economic cycles have been generating tax reform every 20 years beginning with the 1920s, though skipping 1940 when the world was at war. Each was associated with a bull market in equities.
At the same time, corporate tax cuts can increase the disparity of wealth. The disparity of wealth (and income) can be a potent political force, as we have seen. A cut in corporate taxes could also starve the government of revenue, which boosts US debt, and at a time it appears less attractive for foreign investors. The impact on government revenue should not be overstated (and that itself is a problem). Consider that in 1952, corporate taxes accounted for nearly a third of the Federal government's revenue. By 2013, it had fallen to 10%.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.