Want to Kickstart the Economy? Ax Corporate Income Taxes

Talk of overhauling the tax code is stirring in Washington, but the overwhelming complexity of the task makes it difficult to accomplish, at least in the near term. Here’s a good, clean, quick way to tackle part of tax reform – and produce an economic bonanza: abolish the corporate income tax.

In the recent election cycle, hot issues were job outsourcing overseas and demands that corporations “pay their fair share of taxes.” What are the facts and why are these issues important to the job needs of American workers and your investment accumulation and retirement funding plans?

In the Georgia U.S. Senate contest in Georgia, Republican David Perdue’s unsuccessful opponent attacked him for “outsourcing jobs to China,” as part of his efforts to rescue several underperforming corporations. Castigating business, Sen. Bernie Sanders (I-Vt.) asserted, “Despite record breaking profits, corporations bring in less than 9% of federal taxes. It’s time for tax reform.” Tax reform is needed, but not as Sanders would propose.

According to politifact.com, in 2013 corporations accounted for 10% of the federal tax take. The rest came from individuals (50%), social insurance and retirement taxes (36%), excise taxes and other (4%). In other words, the largest source of federal taxes came from taxes on work and investment. Washington taxes corporations up to 35%, the highest rate among major economies.

Here’s a proposal. Let’s create jobs, boost taxable worker pay, and increase stock values in retirement plans so that when money is taken out, taxes rise. How? Cut the corporate tax rate to zero.

No one starts a business and takes a risk unless they believe they will make a profit. Investors will not risk capital unless they can foresee a return from it. What else can a business do with profits? Pay people, provide benefits, pay for outside services, invest in or lease plants, other real estate and equipment. A company can invest in new product design and research, plus advertise products and services. This is the kind of healthy economic activity needed to expand our economy and create jobs.

A company can pay dividends to shareholders. It can buy back stock to increase earnings per share, thereby increasing stock values. Does this just benefit the maligned 1%? No. It benefits small investors, mom and pop Main Street, people saving for retirement in their individual retirement accounts, 401(k) plans, union pension plans and mutual funds.

Source: Thinkstock

Source: Thinkstock

Think about it. With no income tax, companies of every ilk would have more money to spend on economic activity, all of which creates tax revenue on the part of people who benefit. The U.S. would be the world’s hottest tax haven with our rule of law, political stability and global currency. The billions in corporate profits stashed overseas would come home and go to work.

As to outsourcing, if a company goes broke because it cannot compete, everybody loses. But increasingly you hear about insourcing, where American jobs stay in the U.S. or come here from overseas.

Auto plants moved from high-cost Northern states to the Southeast. Boeing is building 787 Dreamliners in a non-union plant near Charleston, S.C., where labor unrest is not a factor and costs are lower. An Australian company is building ships in Mobile, Ala. A number of American and foreign companies have “outsourced jobs” to the southeast, Texas, and other states where taxes are less and entrenched unions are not a factor. Who said, “Taxes don’t matter”?

Despite competition from cheap labor abroad, the U.S. remains a manufacturing powerhouse. As an NBC News report points out, the U.S. produced 18.2% of the world’s goods versus China at 17.6%.

Now, with costs rising in Tier 1 Chinese coastal cities, more production is being outsourced from China to the U.S. The Chinese company Haier Group makes refrigerators in South Carolina. Lenovo is making ThinkPads in NC. In September with a listing on the New York Stock Exchange, the Chinese e-commerce firm Alibaba Group set a record for the biggest initial public offering in the world.

Europe’s Airbus will build A320 airliners in Alabama. Foreign automakers Honda, Toyota, Hyundai, Kia and Volkswagen, along with tire giant Michelin, among others, have expanded manufacturing activity in the South.

Money goes where it is best treated. Taxes matter. If we made America the world’s most favored tax haven, money will flow to the USA. Jobs will be created. Gross domestic product will grow. The money not drained off of business in taxes and payments to tax lawyers will go to other uses, and the multiplier effect will more than make up for corporate tax revenue lost.

Corporations don’t pay taxes, people do, whether in lower wages, lost jobs and diminished opportunities. It is time for tax reform.

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Lewis Walker, CFP, is president of Walker Capital Management, LCC in Peachtree Corners, Ga. Securities and certain advisory services offered through The Strategic Financial Alliance Inc. (SFA). Lewis Walker is a registered representative of The SFA, which is otherwise unaffiliated with Walker Capital Management. 770-441-2603. lewisw@theinvestmentcoach.com.

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