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Thursday, April 21, 2016

Why Taxing Corporations is a Bad Idea

I think a couple of liberal heads may explode when they see the title to this post. Still, specifically taxing corporations in this country is a terrible policy that is costing us billions, perhaps trillions, in tax revenue yearly. How is this possible? Corporations know the loopholes. They know how to shelter their assets and income. They know that they can have their corporate headquarters in a more corporate-friendly nation and still sell goods in the United States. All we are doing is chasing jobs out of the country.

We will get more revenue if we bolster the middle class. By middle class (as opposed to working class) I am referring to households with an income of $80,000 or more. The middle class actually pays net taxes to the government. The working class does not. I should know. I make less than $60,000 a year and, with six dependents, I pay no federal taxes. (Granted, I donate over 10% of my income to charities so my net income is significantly less than my gross.) I'd love to be in a position in which I had to pay taxes; I'd be making a much better living.

(It's sad when you have a college degree and your children qualify for reduced lunch prices at the school that employs you. Still, that's a topic for another day.)

Corporations that headquarter in the U.S. employ people who live here. Upper-middle-class people. People who actually make enough to pay taxes. Corporations that headquarter in other countries pay no U.S. taxes. Neither do the people who work in those headquarters. CEO's. Production supervisors. Engineers. All of the people that liberals want to suck dry. By taxing the corporations, the liberals are in fact forcing their victims to flee out of reach of their fangs.

Liberals don't understand why raising taxes doesn't raise (and often reduces) revenue to the government. Let me sum it up in one short sentence: You can't tax a business that isn't here! Besides, as we have repeatedly learned, the ├╝ber-rich know how to shelter their earnings. Taxing their income will get us nowhere.

"But it isn't fair!" whine the liberals. "They have more money than we do. They should give that money to us! Um, I mean, they should pay their fair share..."

The desire to tax corporations stems not from efficacy but envy. Taxing corporate income isn't effective at all. We end up with fewer taxpayers and therefore less money. However, there are other, more effective ways to increase revenue while also creating incentives for businesses to move their operations to our shores. We should stop taxing income and tax consumption.

"We already tax sales!" cry the simple-minded. "I pay seven percent every time I buy a t-shirt!"

This is true. However, a national sales tax will reduce taxation for middle-income families. Moreover, it will create new incentives for saving and investing money. This, in turn, will provide more capital for the creation and expansion of business, which will lead to more jobs and more earners. This will lead to even more sales to tax (people spend more when they have more), which will increase revenue. The dreaded "one percent" will pay into the system as they consume; the more conspicuous the consumption, the more they will pay. They will not be able to shelter themselves from a national sales tax. If we apply this tax to imports at the point of entry, foreign goods will be double-taxed. This will help reduce the lure of off-shore production. This, too, will result in more jobs and more revenue.

A sensible national sales tax would exempt needs. Groceries, medical expenditures, used clothing, and housing up to a certain price ($300,000 for houses, $2,000 a month for rent) should be exempt. So should water and utilities. Investments (stocks, bonds and mutual funds) should be tax-free. Everything else should be taxed at twenty-five percent. This may seem high, but it is much less than paying that same percentage of your entire income.

In essence, you would choose your own tax rate by choosing how many non-essentials you purchase. If you only spent money on necessities, you would pay very little in taxes. If you decided to buy lots of luxury goods, you would pay taxes on them. For people on fixed incomes, such a tax scheme would be a Godsend.

Envy should not be the basis of our tax policy. It is an illogical motive designed to punish people for their success. It fails to raise the revenue that we need. It reduces the incentive to climb the income ladder and enables the indigent to avoid paying anything into the system. If the chronically unemployed were to pay taxes themselves, they would take more of an interest in how taxes are being spent.

As Thomas Sowell wrote in Applied Economics: Thinking Beyond Stage One, the initial effects of a policy are much less important than the long-range effects. Our current tax system is entirely the result of stage-one thinking. If we really want good results, we have to look at the behavioral incentives our laws create.

Corporations will still have to pay taxes as they buy goods and services. If they produce all of their needed components here, they will avoid taxation and also create career opportunities. If they produce goods elsewhere, they will pay the sales tax twice. If they produce components elsewhere and assemble here, they will be heavily taxed for doing so. The most cost-effective option will be to produce where they sell. This can only be good for our manufacturing capability. If we continue to engage in an economy of consumption, we will eventually go the way of imperial Spain, sending all of our wealth to the nations from which we buy our goods.

Even for liberals, that is not a desirable outcome. Unless they hate America. Oh, wait...

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