Patters

Ezra Klein - Why corporate tax reform will be hard, in one graph



But the basic takeaway is that there are plenty of industries that are benefiting from the current corporate tax code, and are likely to fight like hell to preserve the breaks they're currently getting....

And that's really what corporate tax reform will be about. "Loopholes" sound like bad things. "Incentives to plow more revenues into research and development and equipment" don't. Nor do tax breaks to locate manufacturing in America. But that's the sort of stuff we'll have to get rid of to substantially lower the rates in a revenue-neutral way. And this conversation, remember, is going to happen inside a political system that can't even decide to tax the earnings of hedge-fund managers like income.

Real World

Journolist. How this kid (yes he's still a kid) has a job...oh wait, he writes for Newsweek, nevermind.

The problem with the chart is that corporate rates are based on profit. The relevent question then becomes, what is profit? Just like you might make $50k and therefore should pay inside the say 25% bracket, you probably do not. You (John Doe) will deduct your mortgage interest, or your kid, etc and therefore likely fall into a lower $40k bracket. So just like an individual, businesses use, and/or take advantage of, whatever deductions they can.

As I suspected, the methodology is as follows:

"He derived the effective tax rate for each industrial sector by dividing the aggregate reported net income by the aggregate taxable income."

Another point to consider:

Theoretically businesses don't pay taxes. The consumers, and users of their product or service do. That doesn't mean you shouldn't tax businesses. Even if there was a zero corporate tax rate, businesses would still pay all kinds of assorted taxes like property (both personal and real estate), sales, excise, and the whopper that is matching empoyee income taxes.

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"The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him."
Leo Tolstoy, 1897

chicowalker

There's also the issue that Obama has decided it must be revenue-neutral. That doesn't have to be the case, but of course it will make cuts more difficult.

But has any analysis been done of what the tax revenue would be based on expectations of increased passthrough to the shareholders, whose taxes would then increase? I understand it's a much harder analysis, requiring a look at different assumptions, but that's what the net result would be at some level.

The Brandon Five

Hmm. Then what is the point of changing them? (I am being serious).

chicowalker

That depends on where the offset comes from, I suppose, but I think the notion of requiring revenue neutrality is the wrong approach.

the point of changing them should be that there's no reason to tax that income twice, particularly when it hurts the nation's business climate. (But if you keep spending, the money has to come from somewhere.)

The Brandon Five

Ok, I get it now. So the idea is to promote business by lowering the tax rate without adding to the deficit.

chicowalker

I think so, but I didn't watch the SOTU.