The US currently has the 3rd highest corporate tax rate in the world. This is causing companies to move their headquarters to other countries and hold foreign profits in off shore accounts to avoid the high tax rate. This prevents that money from being reinvested in the United States. Companies also transfer intellectual property out of the United States so they can move profits from US sales to other countries by paying themselves licensing fees in other countries. This is a huge loophole, and a drain not only on government revenue, but on US capital reinvestment.
We can not continue to let our corporate tax policies drive businesses and their capital investment out of the country. To avoid the United States corporate tax rate of 39% companies are moving to counties with tax rates under 15%. Why would these countries have such low rates? They have much smaller economies than the United States and 12% of billions in US corporate profits is better than nothing.
Last year the 39% corporate tax rate raised about 350 billion in revenue to the federal government. If we lower our corporate tax rate to the lowest rate in the world, say 10%, the revenue would be lowered to around 90 billion, a loss of about 270 billion in revenue. However, I suggest that it would not be that big of a loss in revenue. First companies would be more like to leave profits in the US or bring them back here, rather than using the current loopholes to move these profits to other countries. Why would they move these profits to other countries if we have a lower rate. However, we still have huge deficits before any loss in revenue and we should not count on the actions of corporations.
Our huge deficit is another reason for tax reform. Having one of the highest corporate tax rates in the world has not led to corporations paying their fair share. The current corporate tax is a regressive tax on business. Small and medium businesses pay the high rate, but the largest corporations have the reach to shelter their profits and pay lower rates to other countries. Raising the corporate tax rate even higher won’t work. It will make things worse and won’t raise additional revenue.
Our economy in 2016 is not in recession, in fact it is the largest economy in the world. The US GDP is at an all time high. Our economy is larger than the next two largest economies, China and Japan, combined. Even though we are not in a recession, the Federal Deficit is still almost half a trillion dollars this year. This is irresponsible and unsustainable. There has to be a better way to fairly tax corporations without driving them away.
Corporations both inside and outside the United States profit from our market, We cannot close all the loopholes on US corporations, and we have no way to tax foreign corporations goods as they come into the country without causing a trade war. However, we can fairly and equally tax goods sold by any corporation in this country as long as the tax applies to all equally. We should tax goods as they are sold in our market. I suggest the fairest place to raise revenue is with a national sales tax.
A national sales tax will not only collect tax on things and services originating in the US, it will tax the US sale of products made in other places like say China! At the same time we can lower the corporate tax rate to a very competitive level so not only will companies stop leaving the United States for tax reasons, they might come here for tax reasons. Companies will also no longer be penalized for bringing money from foreign profits back into the United States.
Retail sales in the US last year were around 11 trillion dollars. A 10% national sales tax would raise around 1 trillion in revenue. This would not only replace any revenue lost by lowering the corporate tax rate to a competitive rate, it would eliminate the current deficit and allow us to start paying back the federal debt.
A national sales tax is the most common sense way to reform corporate taxes in the United States. It is a fair tax for corporations both inside and outside the US that want access to our markets. It would be a reliable source of revenue that could solve many of the Federal Government’s budget issues. However, it would cause some issues. It would be a burden on the poor and on people on a fixed income, including retirees. The plan to create a national sales tax would have to include provisions to address these issues. Cost of living increases for retirees would address some of the issues. An increase in minimum wage would also help. For retirees with significant savings that would lose buying power, I would suggest that we consider eliminating Federal Taxes on Social Security. There are likely other ways to address some of these issues. I’ve just suggested some of the possible solutions.
The biggest impact of this plan would be the incentive for US corporations to bring profits back to the United States to be reinvested in our economy. The impact of that reinvestment should improve all of our lives. If it also fairly taxes corporations and reduces the national debt then that is a bonus.