Wednesday, February 22, 2012

A comment posted on the Enterprise Blog...

While I agree with your overall criticism of Obama’s plan, I disagree with some of the particulars of your criticism:

It is a fiction that US corporations would be investing more in the US but for their being taxed on repatriated earnings. These companies are not lacking for available cash (or credit) to invest domestically, rather it is the lack of profitable investment opportunities that is responsible for the low level of domestic investment. I challenge you to name a single multi-national with overseas cash holdings that is passing up investment opportunities because of a lack of cash. (note: I would exempt all repatriated earnings from tax provided the companies paid a dividend equal to the amount brought back in – a win/win, as it would provide both a boost to domestic spending and tax revenue on the dividends).

I understand your theory that corporate taxes hurt workers, but that reflects the thinking of people who (I believe) have little if any experience in the real world. Taxes are a cost of running a profitable business along with other categories of expenses such as wages, equipment, raw materials and so on. The price of each (non-tax) expense is determined by the supply and demand curve for that good or service. The equilibrium for wages doesn’t shift upward if a company is able to lower its cost for another category of expense. Nor will a company voluntarily spend more than the market price for an expense because it is able to realize a savings in another category. Thus, were a company to lower its tax rate, it would stick the cash in the bank and wouldn’t raise compensation.

Finally, the Laffer Curve doesn’t apply to corporate taxes to the same extent as it does individuals. Per my point above, taxes are but one cost component that companies factor into their decision as to what opportunities they pursue and what level of activity they operate at. While lowering the tax rate a few percentage points would represent a big percentage drop in the tax rate but a rather small drop in overall cost structure of a business (except for companies with extremely high profit margins). Thus, lowering the tax rate a few percentage points would shift very few opportunities from the ‘not worth it’ to the ‘worth it’ rating. Thus, at best there might be a marginal (and extremely marginal) boost in production.