Paul Ryan's Budget Arithmetic Makes no Sense
Tuesday, April 5, 2011 at 12:39PM Leaving aside for the moment the petty let's be children and see if we can grind the government to a halt game going on amongst parties and sub-parties, and the fact that both parties blessed every single debt cap increase placed before them in equal measure over the past decade of Bush *2 + Obama * 1/2,
I just want to focus on House Budget Chairman, Paul Ryan's, corporate tax decrease proposal for a second - because the math is so bizarre.
Looking at 2010 - the Federal government took in about $2.1 trillion worth of tax revenues, 8.9% of those came from corporate taxes, or about $187 billion. That left individuals footing 41.5% of the bill through individual income tax and another 40% through social security and retirement taxes (get it - we do pay into the system, $840 billion dollars in 2010 to be exact), with the remainder of tax receipts coming from excise and 'other' sources. (The percentage of federal tax revenues that corporations paid in 2009 was 6.6% - the lowest on record.)
The notion that slicing the corporate tax rate from 35% to 25% would spur large corporations to either:
a) fire their accounting staffs and do their returns on Turbo Tax
b) willfully bring all their relevant earnings onshore
c) engage in major hiring sprees or
d) pay rank-and-file workers proportionately more and CEOs proportionately less than in the past
is obviously ludicrous, though not to Ryan or the GOP or apparently, the portion of the Dems that aren't spitting at them with their calculators.
Besides that, it's not supported by fact. To the contrary, since the 1930s, each year in which corporations paid less than 10% of the overall federal tax receipts, coincided with recession and unemployment spikes. The last time that the overall percentage of corporate tax receipts was greater than that of individual ones was in 1943. In other words, when things are shaky for the overall economy, corporations bear a proportionately lower share of tax revenues than individuals. This is not exclusively, but certainly probably, due to their ability to move stuff around their books and hire scores of CPA's to help.
During the 1920s, Treasury Secretary, Andrew Mellon substantially hacked tax rates for companies and the general public under the premise that a magical 20% tax rate would discourage the rich and the corporate from seeking off-shore tax havens and on-shore loopholes. Though Mellon did manage to balance the budget after World War I, the tax practice led to an over-bloated and over-leveraged financial economy during the 1920s followed by the Great Depression. It didn't make charities out of companies. Even though it was more progressive than what we have today.
Sure, the budget stands a bloated mess. But the revenue side and mechanism is far more broken than the spending side, which itself grew due to the cost of wars, weapons and financial subsidies to the nation's richest people and corporations (especially the Wall Street ones). Lowering the corporate tax rate would merely reduce the share of corporate taxes getting to the federal till even further.
Companies like GE may operate under a 35% tax rate in theory, but in practice that rate could be 50% or 0% and the result would be the same, not only because of the complexity of the loopholes in the corporate tax code, but also because there is no wherewithal in the government, or the Treasury department to do anything about it. Hell, the Treasury Department assisted GE Capital, GE's financial, er - hedge fund - arm, when it needed a 'crisis' bailout. The FDIC stepped in with a $140 billion guarantee for their debt in 2008 and 2009. Not only didn't GE pay any taxes during those years, but for 2010, the company managed to manufacture its largest tax refund - $4.1 billion.
How is lowering the corporate tax rate going to change that exactly? Uh, it's not. What it would do, is create a wider budget gap and send more politicians scratching their heads over why. So, it's really just a super-bad and dumb idea.
Reader Comments (9)
It's that time of the political cycle when all the showboaters need to look presidential, and Ryan looks poured into that Brooks Brother. If he keeps it up, maybe he'll get a moniker like Santorum did. It's still #1 when you google the word "santorum". What passes for rhetoric when it spews out of their mouths is bullshit by any other name. Thank our lucky stars Nomi is keeping them legit.
Nomi,
Please consider reading or at least browsing "The Forgotten Man", by Amity Shlaes. I believe you'll get an eye opening on your perception versus the facts of the 1920's, 30's, FDR, Andrew Mellon and economic policy. May I add, this is a very different global economy now with money transfers in seconds, and with the United being the largest debtor nation in the world producing almost nothing except paper. Not so back then.
It amazes me how the some cite figures on how the United States is 5% of the world population, but uses 30% of the world's resources. Why can't we use that same rationale when referring to the debt load of the United States vs. the rest of the world? Because it would go against the statist's inability to stop spending.
Our problems are caused by the entitlement mentality of FDR and LBJ, not lack of taxation. Just look at the numbers and where the deficits really are: www.usdebtclock.org
If you tax GE in hopes of taxing the rich, you tax GE and tax everyone who has mutual funds, 401K's, IRA's, stocks and pensions invested in GE or buys GE products, because they simply pass the cost along. Somehow, "getting the rich" always seems to translate to "getting the working fellow". Funny how "jealousy taxes" really shake out vs what you would think they will on paper.
It's time to bend the cost curve down on federal pensions, medicare, medicaid, social security, fannie, freddie, ginnie and all the other failed big government enterprises. They're out of control and the founding fathers never envisioned the foolishness we've been signed up to, so that a politican can get more votes by "bringing home the bacon". Cut them now or we tip over.
Since you clearly did not read the budget document and then reading "But the revenue side and mechanism is far more broken than the spending side" clearly makes this opinion article poor journalism.
The document addresses your very complaint on page 53: "Remove distortions from the code by eliminating or modifying deductions, credits and special
carve-outs that leave many companies paying no tax at all."
http://paulryan.house.gov/UploadedFiles/PathToProsperityFY2012.pdf
Next, you need to head over to IRS.gov and brush up on the stats... http://www.irs.gov/taxstats/bustaxstats/article/0,,id=112834,00.html
You'll see that the big corporations already average a tax rate of 25% after credits. However, for companies in the asset range of $500K - $25 million, of which represents 50% of our private workforce, pay an average of 32% after credits. The budget proposes moving all these companies to a 25% rate. That's over $20 billion to small/medium businesses which will be offset by taxes at the top end with loopholes and credits removed.
And to be clear, in the eyes of an individual tax payer, it really doesn't matter if the individual is taxed or the corporation. Corporate tax is ultimately paid though lower employee wages and higher consumer prices. But the effect of dropping taxes to small/medium companies will directly result in increased revenue in capital to invest in assets and employees without increased company risk.
I'm sure you'll respond with some false theory that the CEO will take all the gains, but anyone in business would know that would not normally be the case, unless they're already in the process of bankruptcy.
And the 1920s..it was an era of new regulations and the first experiment of the Fed with "easy money" and inflation. The first effect...increasing unemployment by the end of the 1920s. There was a lot more going on than some tax rates.
NateW: "And to be clear, in the eyes of an individual tax payer, it really doesn't matter if the individual is taxed or the corporation."
Cough, Bullsh!t, Cough.
Only a complete dunce with no understanding of human behavior and psychology would vomit such demonstrably false "rational economics" rubbish and expect anyone to believe it.
Why then should any person ask for individual tax cuts! Everyone should be storming the gates of their local congressman's office to demand that companies have zero taxes! Consider what that socialist rag Forbes magazine had to said:
"Exxon tries to limit the tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi. Exxon has tens of billions in earnings permanently reinvested overseas. Likewise, GE has $84 billion in overseas income parked indefinitely outside the U.S."
Yes Nomi, if you were only more serious like Paul Ryan and the grown up corporate-prostitutes in Congress, you'd understand why you shouldn't bite the hand that beats you!
"Congress has responded to corporate complaints about this high tax burden by filling the code with loopholes and special carve-outs. The biggest corporations that can afford the best lawyers have figured out how to use the code to avoid paying taxes altogether."
- "Path to Prosperity", p.53
So the same members of congress who were bought off by corporate lobbyists in the past, like Mr. Boehner who handed out Tobacco "bribes" on the floor Congress, will now do the exact opposite and stop listening to corporate lobbyists, stop taking money from big-donor corporations, and will intact legislation to promote transparency, fairness, and fiscal solvency.
NateW, please expand your submission and tell me how stupid you think I really am.
Well written Nomi, the amount of corporate tax paid is stunningly low, undoubtedly mostly due to the real productive economy being decimated and off-shored over the past 10-20 years. Imagine full employment with high wage, industrial jobs, with 15-20 million more people paying income tax, not receiving tax small refunds and paying essentially no tax b/c they make $10 an hour.
How is this achievable? It isn't in the modern political climate. The only way is thru strong protectionism, nationalizing the Fed to create low interest, long-term financing for production and infrastructure and VAT based upon where goods are made. Foreign produced goods would have a much higher VAT, while domestic goods would be very low. Finally, enact the Securities transfer tax for financial turnover and speculation. The health of the economy is measured in the stock market and other speculation, not real production, so shift the tax burden there, especially when they are the ones causing all the pain!
Finally, it is so frustrating to hear the GOP and other Austrian's calling for the deep cuts, which really means Social Security and other so called "entitlement" programs. People have paid SS tax their whole lives and their SS checks are barely enough to live on. These ppl built the country, won the War and now they are being targeted for literally genocide. The cut and gut, too bad if you die model was a disaster in the late '20s under Mellon and has no place in modern America.
Large deficits cannot be solved thru cut and gut, as proven in CA by Schwarzy. You have to grow the real economy and thus tax revenue to grow out of it. The cut and gut is a death spiral for the nation and lets not forget the Nuremburg precedent of denying a population of the essentials for life.
Keith - I will read The Forgotten Man - thanks for the suggestion. In the research I've been doing for my next book, I've also come across a plethora of newspaper archives and a couple of great books discussing the state of the general economy during the roaring 1920s, and it simply wasn't as stable or pretty as the 'roaring' mantra makes it out to be. I will be more elaborate in the book because it is such an important historical period. And yes, global finance is certainly quicker, but the US bank role isn't that different. It was J.P. Morgan, jr. after all - that lead massive financing or World War I to England and France, one could argue, as he did, this served in the best interest of America's values, etc, etc, but it happened to have consolidated the wealth at the House of Morgan so much so that it was his and 4 other banks that lead their own bailouts in 1929. Jack Morgan and his partners paid exactly $5000 in taxes for the first few years of the Depression (to put that in perspective, he spent $2000 to put himself up in DC during the Percora hearings.) I'm not arguing for corporations to pay 100% of our tax burden, just for a larger, historically comparative and fairer share and the acknowledgement that as much as you shave spending, if you don't increase revenues, it won't work. It also happens to bug me that companies have the luxury of an assortment of well paid for loopholes and customized exemptions - AFTER deducting the expense of salaries for which people that work for them pay higher taxes actually, not 'effectively' than they do. I'm also not against spending cuts, but it isn't entitlement spending that nearly tripled in the past decade http://www.cbpp.org/cms/index.cfm?fa=view&id=125
as our debt burden happened to have done, check this out from the Treasury Department. http://treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_1011.pdf
and Nate - I saw the page about loopholes, he also says some decent things about the health care bill - i.e not forcing penalties on those that don't partake, which I agree with, mostly because I think the bill missed the elephant in the room - the fact that it does nothing to curtail the cost of insurance premiums - I just happen to take it with the same grain of salt as the notion that the Graham-Dodd bill altered the Wall Street landscape. Or that Sarbanes-Oxley was gonna avoid a financial meltdown. But, maybe this time, it'll be different.
Corporations ALREADY pay 0% tax rate. ALL of them. Every single tax dollar they "pay" is factored into their pricing and passed directly on to you. YOU pay their taxes; they don't pay anything. The only effect a tax increase on corporations will have is an increase in consumer pricing. If you cut corporate tax rates, they will just pocket more money, since the consumer is used to paying the existing price.
You need to tax where the money ends up: the wallets of billionaire CEOs. A 35% maximum marginal tax rate (http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213) is absolutely ridiculous. Fix this and the loopholes in the individual tax code where they end up with ridiculously small effective tax rates, and you will have your revenue stream. It really is quite simple. They already know the answer to the problem, but they won't do it because these rich people fund their campaigns.
That is a very good point Naomi. There are good solutions to Medixxx programs, but the insurance industry is heavily regulated in nearly all aspects, forcing insurance costs to increase. What would happen if 40% of the insurance industry goes private? It's already common knowledge the Medixxx already undercuts costs at 80%, pushing the costs to the private market. There are a lot of dynamics not fully addressed in the bill. I do believe there will be big improvements with the bill's approach, but I sense some nuances that could have some unintended consequences. Of course, every bill created by lawmakers will have unintended consequences, no mater how long or good intentioned the bill is.
The best aspect of the bill on corporate taxes is making it and even competitive market. A winner or loser should not be determined by who worked the tax laws better no more than a winner being chosen by who gets to be bailed out. Instead, I see the bill eliminating most of the reasons why the larger corporations are lobbying in DC at the same time allowing the small and medium businesses to compete with all sizes of businesses.