The Arizona Republic

Progressiv­es, rethink corporate taxes

- Robert Robb Reach Robb at robert.robb@arizona republic.com.

The Biden administra­tion proposes to fund its $2.6 trillion American Jobs Plan through a big hike in corporate income taxes. However, even progressiv­es should question the wisdom of making government programs more dependent on a volatile corporate profits tax. There are better ways of using business as an efficient means of collecting government revenue.

The administra­tion advocates increasing the corporate income tax on domestic profits from 21% to 28%. Most states also levy a corporate income tax of around 5%. So, the overall tax take on corporate profits would be roughly a third.

The proposal also includes an increase in the U.S. tax on profits earned abroad from an effective rate of 11% to 21%.

All of this would put American companies at a significan­t disadvanta­ge in internatio­nal trade. The average corporate income tax rate in the European Union is just 22%. And most other countries don’t impose a tax on profits earned by their domiciled companies elsewhere.

To ameliorate this effect, the Biden administra­tion wants to negotiate something akin to an internatio­nal minimum tax on corporate profits. There is some interest in this in Europe, where government­s are irked by big tech companies parking lucrative intellectu­al property in low-tax venues.

The left has always had a blind spot regarding the importance of private sector investment capital in expanding economic opportunit­y. The corporate income tax is just the beginning of the ways in which government reduces the returns on investment capital. If corporate profits are distribute­d, they are then taxed again as income to individual shareholde­rs. If profits make the company more valuable, government takes some of that through capital gains taxation.

But let’s assume, for purposes of discussion, that the left is correct, that public investment is as important, if not more important, as private investment. A tax on corporate profits is a lousy and unreliable way for government to obtain its money.

An accounting saw is that cash is a fact, but profit is an opinion. The corporate income tax is imposed on net income, after deducting allowable expenses. The rules government sets on what constitute­s allowable expenses are blindingly complex. And, inevitably, politics gets involved, as government grants tax credits or more generous deductions for politicall­y preferred expenditur­es and seeks to punish politicall­y disfavored expenditur­es.

This isn’t going to change. The Biden administra­tion may be able to negotiate an agreement with European countries about a minimum corporate income tax rate. But there will never be agreement on what constitute­s net income to which such a rate is applied. The politician­s will never give up their ability to score political points on the cheap through steering corporate deductions and credits.

This, and the natural fluctuatio­ns of the business cycle, render the corporate income tax the most volatile of all government revenue sources. If the Biden administra­tion were truly proposing one-off infrastruc­ture spending, this might not be as big of a potential detriment. But there is lots of ongoing spending in the American Jobs Plan, such as long-term care under Medicaid.

Then, in this country, there is the challenge of achieving equity between big business and small business. Small businesses tend to be what are called pass-through entities. Their profits aren’t taxed at the corporate level. Instead, they are attributed to the owners, who pay tax on them through their individual returns.

The Trump tax cut reduced the corporate income tax rate to 21% but left the top individual rate at 37%. To compensate, the Trump plan exempted a hunk of small business pass-through profits from taxation. If the corporate rate is toggled up, will the small business profit exemption be toggled down?

Arizona has the inverse problem. The Invest in Ed initiative, Propositio­n 208, made the top rate on small business profits 8%, while the top rate on big business, through the corporate income tax, is less than 5%.

Businesses can be an effective and efficient collector of government revenue. The simplest tax to calculate and administer is a gross receipts tax. Where a sale occurs can have its own complicati­ons, but infinitely fewer than what constitute­s “profit” or where it was made.

No one really knows where the incidence of the corporate income tax ultimately lands — on shareholde­rs, customers or workers. Social equity issues should be addressed in how government spends its money. It shouldn’t be a barrier to collecting the money in the most effective and efficient way possible, and in the way that least distorts or hinders the private sector economy.

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