Earlier this week, via Facebook, I shared Joe Nocera's straightforward New York Times OpEd on GE and corporate taxes (Who Could Blame GE? 4 April 2011, link below.) It’s certainly a relevant topic during the week of House Budget Chair Paul Ryan's introduction of his Committee’s 2012 Federal Budget blueprint. A blueprint that’s full of recommendations, musings and assumptions about future revenue levels gained via the Federal – or ceded to various State - tax codes.
As you read Nocera’s piece, I invite you to consider the following.
The tax code is secondly about revenue – and primarily about resource outcome incentives – i.e. driving resource *behavior*.
In times of deficit and debt, great temptation exists for an easy tax code fix to our looming – and some say very proximate – fiscal issues. Many such easy fixes get proposed from the right and the left. None are precisely what they say they are, when results and reality are factored in. Cutting taxes may not increase hiring in the private sector, and raising tax rates may not result in higher net receipts to federal and state coffers.
Here’s one example. Some say that changing the corporate tax code ‘progressively’ will automatically result in increased receipts to Federal and/or State governments.
While hitting corporations with higher tax rates will increase revenues in a relative handful of cases (not everyone hires clever accountants and lawyers, and some pay taxes because they believe it’s the right thing to do), what it will also tend to do is create middle to longer term behaviors which 1) ensure that receipts won’t increase -- and 2) stir up imposed, unnatural political duality between corporate shareholders and non-corporate shareholders.
What such tax ploys may do is create adverse negotiation formats, and a feeling of business uncertainty. Are either of those outcomes desirable, net net? Are they worth that new revenue that’s expected from the higher tax rate?
Net net, perhaps not. It’s not simple to predict which corporations will shut down, relocate or otherwise change as a result of a tax code change. As illustration, I‘ll use a state level example that I’m in many ways close to.
Say a populous, resource rich and customer rich Mid-Atlantic state has the highest corporate tax rate in the country, at 9.9%. Say a smaller state right next to it, which doesn’t have all the customers and resources of the first, doesn’t have a corporate tax.
What happens?
Companies of all sizes do business in the populous state. They live and work there.
They headquarter their company, however, across the river. In the smaller state. Under a well known loophole in the code.
So they pay taxes on a portion of the corporation’s profits – that which makes its way into their own income. Yet they pay as individuals - the individual pays a state income tax of just less than a third of the corporate rate.
The company uses the resources of the populous state, its roads and bridges, its skilled workers and water. But doesn’t pay corporate taxes there. Because the rates are too high.
Is this a moral question? “The corporations and their founders are all bad!” Or is it an economic question “Is that the right tax code for us to have? Does it help our state? Does it make companies want to come here?
“Should our tax code change the way it collects the revenues we need for our state? How much do we need, so that the state can engage the priorities accorded to it?”
And further, “What is this tax rate doing for us, since we don’t fully collect upon it anyway?” Isn't it making us less competitive? "
You probably recognize that I’m talking about Pennsylvania and Delaware, and a set of controversial but necessary questions about corporate tax code treatment that the new and openly tax-averse Pennsylvania governor, Tom Corbett, is taking on.
Whether Corbett, and corporations using the Delaware loophole, as it’s called, are being smart, extremely greedy or a combination of both is not the topic here.
Tax policy itself is neither smart nor greedy. It is an economic tool.
It exists for an economic -and governance- purpose. Tax policy is about behavioral influence -- of optimal resource allocation outcomes. It is not about pitting one class against another. That’s a political narrative that gets linked to tax policy, and I don’t see that narrative ending any time soon.
But it’s good to remain aware that morality plays are not what tax policy is about.
So let’s ask the right outcome questions and work back from those. What should we be doing with corporate tax policy?
For example, and I’m beginning very generally:
1) Corporate profits represent an abundant state and federal resource. How do extensive corporate profits flow more widely and generously back to shareholders, many of whom are seniors deriving portfolio income, or families planning for larger purchase priorities such as higher education? Dividends are distributive. They also build relationships and mutual accountability between corporate leaders and shareholders.
2) Efforts toward social benefit (education, health, safety, opportunity) are necessary to thriving communities. How do corporate profits get reinvested in social benefit efforts rather than in a bonus for one person whom, perhaps due to wealth, is statistically more likely to save than spend/invest said bonus? What incentive pathways and rewards apply to drive positive community outcomes, ones that benefit the workforce at all levels?
Neither of these questions/outcomes is ill for the corporation or individual citizen, yet both have potentially powerful impact on the effectiveness of ‘federal’ and ‘state’ priorities.
For those who want to express anger about how bad GE is for appearing to creatively avoid a perceived tax obligation, these thoughts might be a bit unwelcome. For those who want an optimal - and yes virtuous - result to some significant resource investment questions that we've got to ask?
These fit quite well. Let's start here. Let’s keep asking. Hope you enjoy Nocera’s post.
http://www.nytimes.com/2011/04/05/opinion/05nocera.html?scp=2&sq=joe%20no...