Is it Really a Corporate Tax Paradox?

I try not to dive into politics in this blog, but corporate tax policy has a direct impact on the way companies operate. I’ve seen it first hand. It is a big deal

David Leonhardt, writing for The New York Times yesterday, featured an article about how many companies are exploiting loopholes in the US tax codes to pay very low overall tax rates:

Companies that pay relatively high rates tend to be those that are not expanding rapidly and that are not as ingenious as G.E., at least on taxes. The average total tax rate for the 500 companies over the last five years — again, including federal, state, local and foreign corporate taxes — was 32.8 percent. Among those paying more than the average were Exxon Mobil, FedEx, Goldman Sachs, JPMorgan Chase, Starbucks, Wal-Mart and Walt Disney.

and

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.

Stop for a second. His argument is that companies that are not expanding and growing are paying high tax rates, whereas companies that are growing pay low taxes? What is wrong with that? Companies that are expanding are spending money. They are creating new jobs, both directly and indirectly: directly because they need people to do things with this expansion and indirectly because they are buying things from companies that employed other people to create.

Leonhardt even gives a few examples:

Other companies are able to avoid taxes by spending large sums on new equipment or buildings. Such spending can often be deducted. Southwest Airlines, for instance, has bought a lot of planes in the last five years. Several energy companies with tax rates below 2 percent, like NextEra, Xcel and Range Resources, have likewise been expanding.

Every single one of those Southwest planes was purchased from Boeing, one of the biggest employers in the United States. Not only is Southwest employing new pilots and staff to run these planes, but they’re giving business back to US companies. This is a good thing.

A few months ago I linked to a piece about how taxes are really an incentive:

People who are concerned about the genuinely needy should keep in mind that government doesn’t create resources, it merely takes money from one group and hands it to another. In the process, the government actually makes the total pie smaller, because of the disincentives of taxation.

The article continues:

The situation is analogous when it comes to state income-tax rates. Any particular individual — especially a business owner — decides where to locate for a variety of reasons, including the location of family, love of certain weather, and proximity to cultural activities. But not everyone moves to California or New York. Some people settle for “less cool” places, because of the savings in taxes.

Businesses make business decisions based on revenue and profit. What is wonderful is that in the US, the regulatory environment is relatively easy and tax rates are low, so businesses stay here. As soon as that changes, they will go to wherever the least resistance is, which would mean jobs leaving the US.

That’s why in the 2010 census, the least-taxed states grew the fastest:

Three of the ten least-taxed states—Nevada, Florida, and Texas—were among the ten-fastest growing states. None of them were among the 10 slowest growing states.

Of the 10 states with the highest tax burden, 3 of them—New York, Rhode Island, and Ohio—were among the 10 states that had the lowest population growth. Not one of them is among the fastest-growing states.

Of the 20 states with the lowest tax burden, 12 of them were among the 20 states that gained population the fastest. In contrast, of the 20 states with the highest tax burden, 8 of them were among the 20 slowest-growing states.

So just remember – while it’s fun today to make “big business” out to be the bad guy, they also provide a huge amount of jobs that we want to stay here. Don’t look at the tax code as having “loopholes” – they’re incentives that help keep businesses around.

February 3, 2011