How America was Tricked on Tax Policy. Bret N. Bogenschneider

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СКАЧАТЬ Second, hypothetical future benefits could be posited to other taxpayers. If similar hypothetical benefits are counted today for both workers and other groups, then the result could or would change as it would be determined that workers are indeed paying net taxes. The failure to consider a cash-basis method of accounting to formulate tax policy is an egregious and astounding omission—no trained accountant could possibly overlook such an omission.

An additional sleight-of-hand is next applied by some television commentators and tax policy wonks to suggest that future benefits to workers will be paid only by high-income or corporate taxpayers in the form of cash taxes levied in the future. This is to suggest that high-income or corporate taxpayers will someday fund the tax base, so this assumption about who might pay taxes in the future should be “booked” today in the formulation of tax policy.¹⁵ The method can be illustrated as follows:

	Current Taxes	Future Benefits	Future Taxes	Net Gain Loss
Worker	(45)	45	0	0
High income	(45)	?	(45)	(90)
Corporation	(9)	?	?	?

      The source of federal revenue to fund future Social Security benefits is presumed to be federal income taxes from high-income persons, even though the federal government today receives most of its revenue from a combination of wage and income taxation. The assumption makes it possible to discuss transfer payments as relating to hypothetical taxes paid by the wealthy in a future period, even though transfer payments today are made by workers—and will likely always be made by workers. This method also simply ignores the fact that the federal government runs a deficit now and presumably will run a larger deficit at the time future transfer payments should be made. So, even if progressive tax rates meant that the wealthy were funding the tax base, indeed this would not mean that the wealthy were funding the federal budget, since the federal budget might be funded by borrowing from either past or future workers.

       Deception #5. Statutory tax rates, not effective tax rates, are what’s important to tax policy

Political debates on tax policy usually center on the level of statutory tax rates. For example, in the lead-up to the passage of the Tax Cuts and Jobs Act of 2017, most of the discourse was related to whether the 35 percent corporate tax rate was too high. None other than the Council on Foreign Relations even claimed that the US corporate tax rate was “one of the highest corporate tax rates in the world.”¹⁶ Nearly all news media outlets at the time discussed corporate taxation according to the premise that the taxes paid must be high because the statutory tax rate is high—what a farce!

      The misleading aspect of this discourse has to do with the effective tax rate. In tax parlance, the term “effective tax rate” refers to the tax rate after all incentives or reductions are considered. In this case, a large corporation may receive incentives that reduce the effective tax rate from the statutory rate to some lesser amount, and that amount is the corporate tax rate. Of course, the effective tax rate is a function of many different tax deductions from the statutory rate or other incentives. Estimating the effective tax rate requires having knowledge of the amount of income and the amount of deductions and other incentives available to a taxpayer, such as a large corporation. Most of the time, neither of those variables is known by anyone inside or outside the corporation until the time that the corporate tax return is prepared after the close of the tax year. Therefore, it is entirely possible that a high statutory tax rate (e.g., 35 percent) could apply to the corporation but it has a low effective tax rate because of available tax incentives and other deductions. This was broadly true of the US corporate tax system even before the Tax Cuts and Jobs Act of 2017; the effective tax rate on US multinational firms was quite low, most scholars thought no higher than 21 percent.

My view was then that the 21 percent estimate is too high because it failed to reasonably consider the accumulation of a corporation’s overseas profits. An effective tax rate is calculated as follows: Effective Tax Rate = Total Taxes / Total Income.¹⁷ Both the taxes paid amount in the numerator and the income amount in the denominator must be accurate in order to calculate the effective tax rate. Increasing the amount of corporate profits would reduce the effective tax rate by increasing the denominator of the fraction or the amount of income which the corporation had earned without changing the amount of taxes it had paid. By more accurately stating the amount of corporate profits, I was previously able to estimate average effective tax rate in 2007 instead at 16 percent, as opposed to 21 percent as others had calculated, but in any case trending sharply downward.¹⁸ The downward trend indicated that the average effective tax rate was declining by roughly 0.5 percent per year—so following this trend, as of 2016, the effective tax rate would have been closer to 11 percent. Of course, some large companies pay less than the average rate, especially companies in the pharmaceutical, high tech and automobile industries, where the effective tax rate may be between 0 percent and 5 percent in most years.¹⁹

      Therefore, the US corporate tax rate was not properly described as high. The average effective tax rate for large corporations was somewhere between 10 percent and 21 percent at the time of the reforms. The effective corporate tax rate in the United States was actually relatively low in comparison to other countries. The relatively low rate was due to various factors, including specific incentives contained within the tax code itself. For example, prior to the corporate tax cuts, the US corporate tax system was structured to allow for three things: (1) broad deferral of large corporations’ offshore earnings until profits were repatriated, if ever, (2) a lack of tax enforcement on intercompany transfer pricing (so firms were freely able to shift profits into tax havens or other favorable jurisdictions) and (3) no enforcement of the accumulated earnings tax for large multinational corporations. All of this meant that corporations were not required to pay dividends, which might have triggered additional tax at the shareholder level. Thus, the system was quite favorable for large corporations because it was unlikely that corporate earnings would be taxed much, if at all.

      The pertinent question, then, is why would anyone talk about tax policy in terms of statutory tax rates rather than effective tax rates? Large corporations have smart tax advisors, so ought to be able to estimate the effective tax rate for their potential earnings. Those tax advisors would be aware that the statutory tax rate would not be the rate they would be required to pay on any future profits. Yet most of the discussion at the time was a superficial treatment of statutory tax rates; very little discourse reached an analysis of corporate effective tax rates.

      For their part, economists have long recognized that the most important statistic for tax policy is likely the effective tax rate, not the statutory tax rate. The use of effective tax rates is extremely problematic for economic theorizing, however. Data on effective tax rates is not readily available to economists, and it would always be firm-specific anyway. Absent a solution, this makes it nearly impossible to say anything precise about tax policy by way of economic theory.

      A solution was nonetheless identified within economic theory to render it relevant to tax policy notwithstanding an inability to know what effective tax rates actually are. Economists simply invented as a solution the “marginal tax rate,” which is nearly always equivalent to the statutory tax rate. The СКАЧАТЬ