How Japan is leaving America high and all wet
Ordinarily, I probably wouldn’t blog about another country cutting its corporate income tax rate. But when that country was the last one standing between the U.S. and the industrialized world’s highest such rate, well …
From the New York Times:
TOKYO — Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening.
Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs.
Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry.
Did you notice that line, “which now stands at 40 percent, around the same rate as that in the United States”? What the story didn’t say, and what you need to know to get the full implication of Japan’s move for us, is that only Japan’s rate was higher than ours — meaning ours could soon be the highest in the industrialized world? (The federal corporate tax rate in the U.S. is 35 percent, but state corporate taxes push the average in this country up to about 40 percent.)
Let’s hope this move spurs Washington to take up the various proposals to, among other things, simplify the tax code for corporations and lower the statutory rate to a competitive level.
(H/t: Dan Mitchell)
– By Kyle Wingfield
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39 comments Add your comment
CJ
December 15th, 2010
12:06 pm
Kyle, “Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent,…”
FYI, our marginal federal corporate tax rate is 35 percent. Our effective rate, or “effective marginal” federal corporate tax rate is below 25 percent
Also, according to the CBO:
“Countries with the lowest top statutory corporate tax rates all have much smaller economies than that of the United States and account for much smaller amounts of investment …In general, OECD countries that account for smaller amounts of investment have lower statutory corporate tax rates… In those countries, the supply of capital and the size of the corporate tax base are probably more sensitive to corporate tax rates than they are in the larger countries.
With the exception of the United Kingdom, top statutory corporate tax rates among the Group of Seven (G7) countries were close to the top statutory tax rate in the United States.6 Among the OECD members, the G7 countries are the most similar to the United States in the size of their economies, level of industrialization, and, probably, the degree to which the overall supply of capital and the corporate tax base are sensitive to corporate tax rates.”
http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf
That said, I’m all for lowering marginal rates as long as we can maintain or increase effective rates (i.e., revenue) in the process—at least until we’ve paid off our national debt .
Hillbilly Deluxe
December 15th, 2010
12:13 pm
I’m beginning to think the wise thing to do would be for every American to form their own corporation.
get out much?
December 15th, 2010
12:20 pm
Here is a neat idea. In exchange for eliminating corporate income taxes, all corporate subsidies, price supports and tax breaks will also be eliminated. I wonder if corporate america would take that deal …
CJ
December 15th, 2010
12:27 pm
While on the subject of corporate taxes,
“In his remarks to lawmakers, [Georgia Governor-elect] Deal was also emphatic that his plan to cut corporate income taxes is a key method of spurring job creation. His remarks came just after the head of a special council studying the state’s tax system said businesses make decisions based less on taxes than on the quality of the work force, the education system and quality of life.”
In other words, our new Governor is not one to let facts get in the way of ideology.
In Georgia, we’re about to shift more and more of the tax burden from big business and the wealthy to the poor and middle class, primarily via sales taxes. The notion that shifting from a progressive tax system to a regressive tax system is somehow more fair and will somehow lead to greater economic growth is backwards,and that’s the exactly direction that such burden shifting will take our state.
http://www.ajc.com/news/georgia-politics-elections/deal-presses-lawmakers-for-776660.html
Ayn Rant
December 15th, 2010
12:41 pm
Kyle, you are misled. A high US corporate tax rate is indeed specified in the 9,000+ pages of the federal tax code. Also buried in the 9,000+pages of that shameful document are many loopholes, deductions, and exceptions.
Only the little guys pay the specified corporate tax rate, and even they can cheat by taking overly generous expense deductions and by underreporting revenue. A big corporation with crafty lawyers and accountants, and a few overseas operations, can evade the specified US corporate tax rate with aplomb.
Other developed countries have simpler tax codes and they also impose a value-added tax that requires, and indeed encourages, fair and accurate accounting.
Just take a look at the revenue to tax ratio of large corporations! You’re likely to find that the big US companies pay far less taxes than the countries that have lower official corporate tax rates.
The US tax code is a joke, overtaxed US corporations are a myth, and statistics are a game.
GA Jim
December 15th, 2010
12:44 pm
CJ- You are clearly a knowledgeable commenter so I assume you realize that corporations don’t pay taxes, people do. Corporate income tax takes money from a business entity that would otherwise remain with middle class and poor consumers or be used to buy more capital, create more jobs or be distributed to shareholders.
Corporate income taxes are just a way for the government to tax people in a way that is practically invisible to the public. I am not sure how you conclude that higher prices are good for the middle class and poor.
Jefferson
December 15th, 2010
1:10 pm
It sounds good, it just don’t work.
Ragnar Danneskjöld
December 15th, 2010
1:15 pm
Smart people go where the climate is most favorable. Smart capital goes where the investment climate is most favorable. Smart governments do what they have to do to attract investment.
We do not have a smart government.
Hillbilly Deluxe
December 15th, 2010
1:17 pm
Corporate income tax takes money from a business entity that would otherwise remain with middle class and poor consumers or be used to buy more capital, create more jobs or be distributed to shareholders.
Not necessarily. It could go for executive bonuses, trips, or whatever; shareholders have very little say in large corporations, today.
If XYZ Corporation, is charging $100 for it’s widget, they are charging as much as they think the market will bear. If people are willing to pay $100 for that widget, they’ll still pay $100 for it, after the tax is decreased. XYZ Corporation isn’t going to pass that savings along, unless they feel they have to, to keep profits at the same level.
It’s all abstract theories, and nobody really knows what all the answers are.
CJ
December 15th, 2010
1:24 pm
GA Jim, “corporations don’t pay taxes, people do”
Interestingly, that’s exactly the quote that Neil Boortz repeats ad nauseum on the radio.
Regarding your sarcastic comment that I believe that “higher prices are good for the middle class and poor,” a little refresher from Econ 101. Prices are a function of supply and demand, not corporate tax rates (yes, corporate tax rates, among several other factors, influence the amount of competition or supply).
As an example, Boortz listeners seem to be under the false impression (because Boortz intended it that way) that if a business’ tax burden rises by $1,000, then the business will just increase their prices accordingly to recover that $1,000. But since price is a function of supply and demand, they’re not going to do that if raising their prices would reduce revenue due to the resulting reduction in demand—demand which will be even more elastic (downward) if sales taxes are high.
Setting prices is a function of the marketing department charged with maximizing revenue since business must first make a profit before they can worry about any taxes they need to pay on that profit.
Ragnar Danneskjöld
December 15th, 2010
1:32 pm
Dear CJ, good afternoon, you err by omission. Where government raises all costs (e.g., via tax) production decreases to a level below market equilibrium, due to the unchanging demand curve. Where government decreases all costs, production remains comparatively constant (due to the sunk costs of capacity) and prices for all decrease.
Ragnar Danneskjöld
December 15th, 2010
1:36 pm
And CJ, while I do not listen regularly to Mr. Boortz, I agree that he errs if he asserts “business will just increase their prices.” Higher expenses, imposed by government fiat, can be reflected in any of four ways:
(1) Decreased return on capital, which has the effect of chasing capital to more favorable venues;
(2) Lower bids for raw materials, which has the effect of constricting production and reducing gross revenues;
(3) Lower wages for employee;
(4) Higher prices for consumers, due to the greater costs of production; and
(5) Market inefficiency. The inefficiency is the only guaranteed result of government interference with production.
Kyle Wingfield
December 15th, 2010
1:38 pm
CJ: “Effective” was the NYT reporter’s word, not mine. But high statutory rates do have an impact because they favor those companies that can exploit loopholes — and encourage more companies to lobby for loopholes. Given a choice between a simple tax code with, say, a 25% statutory and effective rate, and one that has a similar effective rate but requires companies to make a lot of potentially inefficient decisions to get to it from the higher statutory rate, I think the former will win out most of the time.
As for who really pays corporate taxes, you’ve severely misrepresented the argument made by Boortz and others. But your line about marketing departments setting prices makes me think you might just not be educable.
Ragnar Danneskjöld
December 15th, 2010
1:38 pm
Apologies to all @ 1:36. Obviously I cannot count to five.
Kyle Wingfield
December 15th, 2010
1:39 pm
…though I see Ragnar has given it the old college try.
Ragnar Danneskjöld
December 15th, 2010
1:45 pm
Dear Kyle @ 1:39, ha. CJ and I have been crossing swords for years. Lately I have not kept up my share of the discussion, however.
CJ
December 15th, 2010
2:06 pm
Kyle,
I apologize for the misquote. Yes, that was from the Times.
And, in case you didn’t notice, we agree on a lower marginal rate with a simpler tax code. But again, you mislead your readers when talking about statutory rates without also putting them in context using effective rates, comparing them to countries with economic similarities, and putting them into context regard other factors influencing business decisions. The world doesn’t operate in a “marginal tax rate” vacuum.
Also, I’m not sure how you can argue that I misrepresent the argument from Boortz and others when that argument is right there in black and white @12:44. Anybody who listens to Boortz knows that GA Jim restated his argument nicely.
Finally, whether self-employed, running a small business, or a multi-national corporation, pricing is a MARKETING decision. You might want to do a little research on that before you comment further.
CJ
December 15th, 2010
2:09 pm
Anybody who listens to Boortz knows that GA Jim
restatedparroted his argument nicely.Kyle Wingfield
December 15th, 2010
2:21 pm
CJ, neither Boortz nor GA Jim, in that 12:44 comment you referenced, talks only about consumer prices. What can’t come out in higher prices comes out in, for the most part, lower earnings for shareholders, lower wages for employees or lower investment. GA Jim mentioned most of these things, and I’ve never read or heard Boortz on corporate taxes when he didn’t, too.
carlosgvv
December 15th, 2010
2:24 pm
Japan can afford to do this because most of the military burden of protecting them is shouldered by the United States. Yes Sir, you can always count on good ole Uncle Sam to save the world, even if his own world is falling apart.
CJ
December 15th, 2010
2:27 pm
Oh jeez.
GA Jim closed his comment by writing, “I am not sure how you conclude that higher prices are good for the middle class and poor,” and I responded directly to that statement.
I’m sorry for leaving you hanging on the rest. I’ll get come back to it.
JDW
December 15th, 2010
2:32 pm
@Kyle,
First off the key measure is not the top statutory rate rather it is what is actually paid after the financial engineers are done. Ours was around 25% according to the GAO but has surely declined since the study was released.
http://www.gao.gov/products/GAO-08-950
Next, the simplification issue. Yes we need to simplify our tax code in general. We do not need to cut revenue and continue to add to our ever mounting deficit. We need to decide how we are going to generate the appropriate amount of revenue to cover spending. You want to reduce spending fine, get the votes, but we need to stop reducing taxes and by extension revenues and creating deficits.
Kyle Wingfield
December 15th, 2010
2:35 pm
And because he reiterated one point, that means the rest of the comment doesn’t count?
That’s my problem with you, CJ. You pick out one phrase or sentence from a longer train of thought, and act as if nothing else was written. As evidenced by your faux Boortzian example that “if a business’ tax burden rises by $1,000, then the business will just increase their prices accordingly to recover that $1,000.”
You’re the only person, here or on Boortz’s show, suggesting that that’s the argument.
Left wing management
December 15th, 2010
3:10 pm
You’re overlooking the loopholes, Kyle. When you take those into account, that changes the picture somewhat. Instead, we should focus on the effective tax rate, the percentage of corporate profits that is paid in federal corporate income taxes. This amount has fallen drastically in recent decades to less than 30% of profits after being nearly 50% at mid-century.
In the Japan case, as the article points out, the real problem is stagnant demand in Japan, especially with an aging population. In other words, this move is more like grasping at straws than a real way forward.
Besides, corporate profits have just hit record highs, even as workers continue to suffer. Why on earth should be drop the tax rate on those very profits now?
CJ
December 15th, 2010
3:20 pm
Kyle,
You have the bad habit of throwing cheap punches that actually misinform, but are, as you have said, “tangential” to the main thrust. You don’t seem to like it when people push back on the misinformation included therein. In his comment, GA Jim used that same tactic with his closing statement (which, by the way, reiterated a portion of his more articulate assertion above)
And, if somebody, makes multiple severable assertions, it isn’t irresponsible (or always possible) to push back on one or some of them, especially the cheap/tangential ones, without addressing each and every one of them. I don’t suggest or imply that the rest of the comment doesn’t count. That’s you’re inference. That said, given that the credibility of the person making the false or misleading assertion has been called into question, such inferences can be expected.
Again, I was very clear about the misleading sarcastic comment that I was addressing.
get out much?
December 15th, 2010
3:26 pm
carlosgv@2:24 – while the Japanese constitution forbids them from waging war, the Japanese Self Defense forces are more than capable of defending themselves. In no way does Japan depend on the US for defense.
Kyle Wingfield
December 15th, 2010
3:39 pm
Ok, CJ, then how do you explain your example about “if a business’ tax burden rises by $1,000, then the business will just increase their prices accordingly to recover that $1,000”? It’s clear from the context that that’s not what he said. That’s what I mean by misrepresentation. You didn’t simply ignore what he said; you gave an example that suggests he said something he didn’t.
carlosgvv
December 15th, 2010
4:08 pm
get out much
Japan has no nukes. Most if not all of their potential enemies do. So, yes they DO depend very much on our very expensive nucelar umbrella to protect them. And guess who pays almost all of the bill?
CJ
December 15th, 2010
4:16 pm
GA Jim wrote…
“Corporate income tax takes money from a business entity that would otherwise remain with middle class and poor consumers or…”
Yes, he finished this boneheaded assertion with the word “or”. But then he finished with, “I am not sure how you conclude that higher prices are good for the middle class and poor.” There wasn’t an “or” the second time.
I also qualified my comment with “Boortz listeners seem to be under the false impression…” That comment is based on my personal experience with people I know who worship at the alter of Boortz.
If I misunderstood GA Jim or, if I misunderstood Boortz when I’ve listened to him (yes, he often focuses primarily or exclusively on consumer prices when supporting his “corporations don’t pay taxes” mantra), or if I’ve misunderstood conversations I’ve had with Boortz-o-files, then my example is entirely moot and probably not worth anybody’s attention.
Jefferson
December 15th, 2010
5:41 pm
The US is also making the mistake Japan did by the Fed keeping interest rates so low, they went to near zero and their economy sucked for 10 long years.
I Report (-: You Whine )-: mmm, mmmm, mmmmm! Just sayin...
December 15th, 2010
5:50 pm
Maybe that is because one of the few Democrat grownups in Washington, senior Obama economics adviser and former Harvard University President Larry Summers told reporters last week that failing to extend the Bush tax rates would cause a double dip recession, which makes Art Laffer’s analysis bipartisan. But…wait a minute. Didn’t…the Bush tax rates…cause the recession in the first place?
The dummycrats are trickling down.
ew
Left wing management
December 15th, 2010
6:07 pm
“Maybe that is because one of the few Democrat grownups in Washington, senior Obama economics adviser and former Harvard University President Larry Summers …”
Larry Summers don’t know jack .. send him back to the womens admirers club at Harvard
LD
December 15th, 2010
6:22 pm
Corporations have insisted on rights of speach and involvement in elections as individuals and should, therefore, have the same tax rate as any individual having the same amount of income–except that, it would make sense to give targeted tax breaks to corporations only for those profits REINVESTED here to create more jobs in USA.
Michael H. Smith
December 15th, 2010
6:36 pm
Corporations do pay taxes and they do pass onto their costumers as much of the costs incurred from those taxes as they possibly can and remain in business. If they can pass on their entire tax burden, then they will do exactly that very thing by any legal means that they can. Which means eventually we the consumers will pay for everything after the “shell games” have all been played by government and business.
barking frog
December 15th, 2010
7:31 pm
Corporate and Estate taxes should be abolished.
No More Progressives!
December 15th, 2010
8:33 pm
GA Jim
December 15th, 2010
12:44 pm
CJ- You are clearly a knowledgeable commenter so I assume you realize that corporations don’t pay taxes, people do.
CJ doesn’t have a clue. He thinks money falls from the sky when a “D” is in the White House.
William C Smith
December 15th, 2010
11:11 pm
Our corporate rates are the highest. At this time we need major reform in the field of taxes. Taxes need to be more understandable and at the same time more easy to compute. This in the long run would be able to bring in greater revenue. The problem does not rest on the desire of the public which wants these changes. Just as the Bar Association prevents tort reform that pushes medical care higher. At the same time the accounting special interest will prevent meaningful inome tax reform and simplication.
I Report (-: You Whine )-: mmm, mmmm, mmmmm! Just sayin...
December 16th, 2010
4:33 am
Significant cuts in greenhouse gas emissions over the next two decades could give polar bears a chance of surviving over the long term by preserving the Arctic sea ice on which they depend, according to a new study published online Wednesday in the journal Nature. -Urinal
What, is the AJC some sort of fairy tale now? Do they spread pixie dust, er, I mean, fertilizer, where ever they go?
I never seen a more ridiculous, ate up statement.
GA Jim
December 16th, 2010
10:08 am
CJ- Sorry I missed out on all the fun since my earlier commment. I appreciate your comparison to Mr. Boortz but I am not a listener. Based on your assertions, though, he clearly has a better grasp of economics than you do. If you truly believe that people don’t end up paying the cost of a corporate income tax then I overestimated your powers of reason and there really isn’t much point in trying to have a discussion with you. Merry Christmas.