Wednesday, August 20, 2008

The New York Times' Crazy Idea

Yesterday's NYTimes published an editorial, The Corporate Free Ride. It railed about corporations not paying their fair share of taxes.

Geez! I've posted about this before, here's one more go at it.

No corporation in the history of the world has ever, ever paid a penny of tax that it hasn't collected from the pocket of a person. A corporation is a "person" by virtue of law. In reality it is a package of paper that allows a group of people to conduct business and shield their assets from liability for the "actions" of the corporation. In theory, and in practice, this promotes investment.

When a corporation sells a product or a service it gets money from a person of the two-legged variety. It charges for its costs and tacks on a profit. Those costs include the money it has to pay to the government - taxes. Increase the amount of the taxes, and the corporation incurs an increase in its costs and, if the market allows, increases its price to the person. If the market doesn't allow it to cover the increased cost, in time it goes out of business (or moves to a country with lower costs).

In either case, the end result is a two-legged person paying the tax or suffering the losses resulting with the bankruptcy or job loss due to the corporation's offshore move.

The NYT editorial is a classic example of what is wrong with us. "We" need money. So we, in the persons of our elected representatives, stick another tax on businesses, businesses that increasingly have to compete with businesses around the world. Businesses in places that do not exact as high a tax burden. US businesses fail. Jobs and money flow out of the US. The trade deficit worsens. The downward spiral continues.

Want to reverse the cycle? Stop taxing corporations. Foreign and domestic investment increases. Imports decrease as goods and services originating here are less expensive. Jobs increase. Exports increase. The trade deficit over time becomes a surplus.

And taxes, now paid by two-legged people? They are transparent. They still are being paid and the amount paid by you will increase; but, the amount you pay for products and services, no longer burdened by taxes, will go down. A wash. And, you know what your government is costing you. If you aren't happy about that cost, you go about letting your representatives know about it.

I know, it's a crazy idea.

9 comments:

Anonymous said...

The tax debt would only be a "wash" assuming that all people use all products equally. Right now people who ride the bus pay less of the gasoline and oil taxes than people who drive Hummers, and I think that's fair.

I know locally several big corporations have worked out deals where they don't have to pay property taxes. They threaten to take their jobs overseas, and suddenly they don't have to pay the same taxes everybody else does. That, of course, drives up the property taxes for individuals, since they have to make up the deficit. The stockholders gain, the community loses; that's pretty much been the story since the Reagan years.

Dave said...

You're making me think Thomas; but, I think I'm right.

If today I'm a Greyhound kind of guy and you're a Hummer guy (drive a little Hyundai) we both pay some tax imposed on Greyhound and GM. Take away the tax and maintain the current tax structure and we both pay more, but proportionately about the same rate we were paying. Similarly, I save a bit less when Greyhound cuts its price and you save a bit more as the tax "cost" imbedded in a Hummer is is more than my small share of Greyhound's smaller per rider imbedded tax cost.

As to the real estate taxes, special deals existing now do skew what people pay in real estate taxes; but, if no corporation paid them the consequences would be the same as set out in the first paragraph of this comment. The test of the companies "threatening" to move offshore being a real threat based on real costs, is the number of them that don't get the tax break and do move. There's more and more of that going on, something that would be reversed under my regime.

Anonymous said...

Right on Dave !! May be hope for you after all!

Gypsy at Heart said...

Well explained. The way you put it, your solution makes sense. I cannot imagine that others haven't thought of it (the way you do) also. Why then hasn't the situation righted itself And we continue on as we are?

Hedy said...

It's a great theory - this idea that large corporations will take the money they save in taxes and pass it on to consumers. But the gorilla in this room is ethics. Scandal after corporate scandal we're plagued with and who ends up paying for it? Taxpayers. Not the free-ride big corporations - some of them largely responsible for these crises - it's us, the two-legged taxpayers, who foot the bill for corporate greed and bad ethics. I love your idea in theory, Dave, and if large corporations had a better track record of doing what's right rather than what's most profitable in the short term, it would work.

Dave said...

Milena, one, because people don't think (who in their right mind leases a car (other than someone who values new on a regular basis over cost) when the cost of buying one over the useful life is less? Two, because many people don't pay much in the way of taxes and are perfectly happy re-electing pandering politicians. Three,because thinking people (see Hedy's comment) don't trust corporations as far as they can throw them (though remember they're just a pile of paper).

But, Hedy's wrong that you have to trust to corporate America's trustworthiness and ethical sense. Trust in the "Market."

Do you really think the airlines are bleeding cash because they want to? Why not raise prices to cover their fuel bills? Because of competition. If you have a choice of Delta to where you want to go for $200.00 and United for $300, which are you going to choose? So they hang on, cutting capacity to the point that people who need to get somewhere don't have a choice but to pay a higher price.

Publix and Kroger are the big two in Atlanta groceries. For some reason the price of milk is down in the last month. Publix started advertising a gallon for a cheap price. A week or so later, Kroger was advertising its own cheap milk. If they compete fiercely over the price of a gallon of milk, do you think that after their taxes are lifted, that Publix will keep high prices if Kroger drops its prices? And if both keep their prices high, some company will see an opportunity to enter the market, undercut them at a profit and force them to play the game under the new rules.

Corporations and government, populated by people, will continue to break the law, act unethical and shave corners. But they would do it under a bit more light. That people are basically cussed is not a reason to not impliment a system that will benefit us.

Like I said, it's a crazy idea.

Posol'stvo the Medved said...

[cliche]

... so crazy, it might just work ...

[end cliche]

Hedy said...

Very helpful, Dave. This is a great post, with great comments. I just read this article that helped move me along a bit more in understanding this: http://www.realclearmarkets.com/articles/2008/08/do_corporations_really_pay_no.html

I usually do an okay job of figuring out the agenda for this type of obvious hype, but I missed this one.

Dave said...

Pos, which crazy idea, NYT's or mine?

Hedy, there was a line or so in the NYT piece that ranted about something like 2/3's of corporations paying no taxes, neglecting to point out that about 2/3 or so of corporations are LLC's or Sub S corps that are pass throughs - the corporation passes through their earnings to its owners/shareholders, who, guess what, pay taxes on their earnings.

Now I'm all fired up to do another post on the FairTax, the next logical path to fair taxation, I think with one class in micro-economics.