Monday, September 5, 2011

Tax Code Reform Phase One

Maybe Congress should start tax code reform with the corporate tax code--it's more out of whack than the personal income tax code. A recent article by Reuters discussed how even in a pretty good year like 2010, some large corporations paid more to their CEOs than their federal income tax. Corporations that fare well by the current tax code would love to see it stay on the back burner. That way, companies can continue lobbying for  and receiving their specific breaks while the country is distracted by other debates. Tackling the corporate tax code first is a good chance to show seriousness and test the mechanics of reform before tackling the tax code that will impact the voters more.

There maybe some drawbacks to this plan, however. We don't want the reform to kill business decision-making, especially hiring. It might be best to have a commission of the business-knowledgeable representatives figure out what is fair, then open discussion, then vote.

(An aside: I prefer commissions because they have done better work on thorny problems than the standard congressional debate and committee system. Compare the deficit commission's work, though ignored, with the mess from the healthcare reform debate.)

On the other hand, the corporate tax code is more complex. So maybe starting there is a bad idea. It might be safer to test the waters and craft compromises with the individual income tax first, building expertise and goodwill in the process (I'm an optimist, I guess). Then tackle the corporate tax code.

OK, scratch the original idea. I just hope this wasn't a total waste of your time. After all, you got a peak at my thought process.


Anonymous said...

As with most things in life, the tax code comes down to ANDs and ORs, and where you put the parenthesis.

You say that you don't want to "kill business decision-making, opespecially [sic] hiring". That is, I'm sorry to say, a ridiculous notion. Tax costs on profits are just a small element of any big or small business decision-making process. Since most taxes are on profits, business first have to learn how to make a profit from an endeavor. Then they worry about minimizing taxes (or at least their accountants do). Hiring decisions do not run into decisions on the profits. That's a fiction created by the same illogic of torture being necessary in a ticking-time-bomb situation. In short, it's cart-before-the-horse reasoning.

Suppose a businesshad to pay NO taxes. They could factor in all the profits they make toward long-term planning. Does a business take some of the money it would have paid in taxes and hire more people? Only if they could make MORE money from those hires in the future. The same goes for keeping employees.

I've worked with hundreds of companies, large and small, over the years and hiring decisions are never based on the tax consequences of the profit the employees would generate above their costs. Salary and benefit costs? Absolutely. Past, present and future profitability considerations? Of course. Taxes? Except for direct SS/Medicare and UI/WC taxes, no way.

It's a supply side myth. If it were true, the massive tax cuts from the Bush years should have generated a hiring boom like no other. It didn't. We got the opposite. One could argue cause/effect, but only indirectly. The same is true for the boom in the 90s after the tax hikes.

How we decide what to pay for and how as a society definitely has an impact on economic growth. Money was spent stupidly in the 2000s under the GOP war and economic policy agenda. Corporate money was also spent stupidly, despite having more of it. And we got a near depression because of it.

The only solution is good decisions going forward by both businesses and government. "Reforming" the tax code cannot and will not be an enginre for growth. It's just shifting the ANDs and ORs and parenthesis of what is revenue, expense, profit, loss and jurisdiction. Clever accountants will go back to gaming the rules. Bank on it.

ModeratePoli said...

I don't know where the communication failure happened, but I never said that reforming the tax code will be an engine for growth. Maybe you inferred that because I didn't explicitly say why we should reform the tax code. Nonetheless, you're reading much more into this piece than I wrote. Elsewhere, I've written that I think we have a long, slow recovery ahead of us, and supply-side magic won't hasten it, just as the tax cuts of the past 10 years haven't helped.

I appreciate your experience, so I'd like to hear you comment on the effect uncertainty over changes in the business tax code would have on hiring. My guess is that uncertainty, added to an already slow economy, would slow hiring even more.