Tax policy can be normalized internationally (without homogenizing tax rates) preventing all complainable effects of tax inversions (corporate HQ relocations), and off shore ownership structures (tax haven wealth management). It can be done so with a very simple tax code as well. But first,
Everyone that claims lower corporate tax rates would create employment and investment is intentionally lying, and attempting to increase wealth innequality and destroy the economic health of your society.
With certainty, higher tax rates increases employment and investment, because the tax code everywhere provides business income tax deductions for such spending. and so lowers the risk of investment/spending
The reason that
intentionally destroying civilization and your society through corporate tax cuts can seem very attractive is that tax cuts increase the value of previous investments. Your investments and spending from 1 to 30 years ago can pay off more with lower taxes. If your goal is to harvest profits and disinvest in society you can gain a greater share of the scraps by destroying society, than by (re)investing in it, if you view investment elsewhere as fundamentally more attractive. Globalization creates alternative investment location opportunities, and destructive harvesting opportunities (made more attractive by artificially propped up valuations) at home can amplify foreign opportunities.
Destructive harvesting is an evil human nature opportunity that is not limited to US Republicans and other conservative liars. The prospects of a Detroit or Chicago bankruptcy can be met by ignoring it, harvesting incumbent city employee and pension income for existing beneficiaries, and making bankruptcy future promissories's problem. The Goodfellas model is to control a restaurant, steal everything you can, and when there's nothing left to steal, light a match.
US Republican talking points
Obama yesterday announced treasury policy that blocks the high profile tax inversion merger involving Pfizer, and did so with a theme, embracing the outrage surrounding panama papers related tax avoidance strategies.
The Republican talking points (consistent since 1980) response, is what prompted this essay. All Republican presidential candidates and the controlled media pundits owned by their puppet masters use this news to continue their passionate and emphatic (revolting feigned sincerity) advocacy for lower corporate taxes with the absolute lie justificiation that it would be economically stimulative rather than the intentional scavenging and stealing form society, until civilization is weak enough to
drown in a bathtub (light the match).
Lying filth trying to destroy your society (with corporate tax cuts) are more dangerous than thieves and terrorists, because the latter risk liberty and life for their actions. America can survive an ISIS friendly caliphate. It cannot survive Republican influence.
Republicans have every right to vote for tax policies that destroy society to their advantage. I/we must insist that they present an honest case for why we should accept that they deserve those gains and we deserve those costs.
Corporate tax rate cutter advocates must be denounced as intentional liars rather than idiots for this falsehood. There is no one in the world who can honestly (or at least with informed rationality) self assess a higher propensity to risk their own capital if their tax rate is lowered. So, there is blame all around for tolerating the social destroyers.
Ayn Rand's glamourized industrialist
The core simplification of Ayn Rand's philosophy is that industrialists are better more valuable and important people than the rest of us minion hopefuls. The claim is based entirely on using capital as investment that permits jobs and goods for the worthless minions.
Industrial investment is that investment purposed to production growth (includes research). The term is used to distinguish between unqualified investment that can include shuffling title to paper, and investing in sure things (cost cutting processes).
The
deindustrialist or non-industrialist is someone, who through past events, happens to own assets and is primarily interested in diverting/harvesting the asset income streams for personal enjoyment. This must be Ayn Rand's lower-than-worthless-minion anti-hero. The behaviour is the opposite of everything she glamourizes and extols.
Lower taxes reward and motivated deindustrialism. Higher taxes motivate industrialism.
A powerful mind control technique is that the hero deserves benefits/rewards and gifts from the audience. Another easy mind control trick is to substitute the industrialist hero for all rich republicans, implying that they necessarily all meet all industrialist ideals based on shared wealth trait. Few people look for systemic policies that would intrinsically promote/motivate industrialism without gifting additional rewards to heros. Successful industrialists do not need additional gifts to be happy. If our Randian adoration is insufficient, the heaving piles of cash can console them.
Legitimate complaints about tax policy
Tax policy is ineffective and unfair where it fails to mitigate investment risks and doesn't treat losses as mirrored tax benefits to the tax cost of gains.
Taxes, when used to support war, cronyism, and needless bureaucratic authoritarian permission hierarchies. The legitimate complaint about taxes is how the taxes are used. Basic Income (UBI) is the means to perfectly address this complaint. (Higher) taxes are redistributed as an equal social dividend, and any social programs are paid for equally through an equal sacrifice of dividends.
The simple (natural) tax policy (suitable for international harmonization)
Originally described
here, and refined
here,I will describe again succinctly
- Basic income (flat refundable tax credit) with a flat tax on personal income with no preferential treatment for investment income. This creates more progressive tax system that our current graduated rates.
- Corporate taxes based on cash flow (instead of revenue less expenses) including tax deductibility for dividends paid. Capital inflows (stock and bond sales) are taxed the same as revenue.
- Corporate income tax rate equal to personal flat tax rate.
- Sales cash Inflows are taxed in the country of the buyer. Expenses are taxed deducted in the country where the expenses are bought.
- Investment inflows and outflows (dividends/interest paid) are taxed consistently in the company's country (or consistently in investor country). Inflow and outflow must be taxed and deductible in same jurisdition
- Countries may have their own tax rates, and all of the special incentives and deductions they wish for expenses.
- An optional special supplementary rule, (discouraged later), is a provision for pure exporters to match expense (credits) to some sales (lowering foreign tax obligations from sales instead of creating a domestic tax refund.) .
Simple progressiveness
With a $15k UBI and 33.3% flat tax rate, an income of $45k pays 0 net taxes (15k UBI and $15k income tax). At $90k income, the net taxes are $15k, and 16.66% net tax rate. These rates are lower than current major national rates.
Eliminated of arbitrage possibilities
An equality of employement, investment and corporate tax rates eliminates all main income manipulation strategies. Equality of taxability of revenue and investment inflows further eliminates tax arbitrage.
Special rule: 10% surtax on investment gains
I advocate for a 10% surtax (above and beyond corporate and personal income tax) on investment income gains that is not refunded on investment losses. This does not violate the unequal risk to reward opportunities of investment due to other features of the tax policy. For example:
If you were to invest $1M in a company today (with natural tax policy), that is in a country with 50% tax rate, you would receive $500k tax rebate from that government today. (The company pays/owes $500k in taxes on the investment proceeds). Net investment cost is $500k. If 10 years later, you sell that investment for $2M, you pay 10% on the gains ($100k) in taxes in that company's country + the 50% normal tax on the remaining $1.9M ($950k) for total net proceeds of $950k. (A $450k proft or 90% return). If the investment was worthless 10 years later, there would be no tax payable, and the refund for losses was already paid at the time of investment.
Because of the timing difference between tax rebates for investment purchases and taxes owing for investment sales, there's a fair compensating benefit for the slightly asymetric tax consequences of gains vs losses (the 10% extra tax on gains that doesn't get rebated for losses).
The jurisdiction of this tax (company vs. investor) must be consistent. Administratively simplest is to tax dividends and interest payments in company's jurisdiction (10% withheld and tax paid directly by company), while taxing gains on title transfers in investor jurisdiction. For the most complex example, A US IPO selling $1M in shares to Canadians would have a US tax on the $1M, and the Canadians would get refunded US tax for their investment, then repay the refund (0 net tax) as they move title to Canada, and receive a Canadian tax refund. When they resell their shares, Canadian tax would be owed on the gains and proceeds. The location of the investment account rather than the nationality of the investor can also simplify tax jurisdictions.
A hypothetical Ford example
Imagine the flat tax rates for these 3 countries are: Canada 50%, USA 30%, and Mexico 10%. If the manufacturing expenses in all countries were the same, then Ford would prefer to do all manufacturing in Canada, because that country offers the highest tax rebates for expenses.
If Costs to manufacture were $500M in Canada, $400M in USA, and $300M in Mexico, then Canada is still the least expensive after tax as it costs $250M vs $280M in USA and $270M in Mexico.
If Car sales were $100M in Canada, $1B in USA, and $50M in Mexico, then Canada could choose to apply rule 7 in order to prevent paying Ford $200M in tax credits ($250M from expense credits less $50M from revenue taxes). If Canada did apply rule 7, then Ford might choose to manufacture everything in the US. From Ford's perspective, it could only offset $100M of Canadian expenses with $100M of Canadian sales, and would apply the remaining $400M in expenses to US sales.
with rule 7, Ford and national net revenues for manufacturing in each country:
Canadian Manufacturing: Canada 0, USA $180M, Mexico $5M, Ford $465M
US Manufacturing: Canada $50M, USA $180M, Mexico $5M, Ford $515M
Mex Manufacturing: Canada $0M, USA $255M, Mexico $0, Ford $595M
Both Ford and the US maximize net revenue by producing in Mexico, and Canada loses out by applying rule 7 to avoid paying $200M in tax credits to Ford, that it would make up anyway by the 50% taxes collected on the parties Ford is paying $500M, and the multiplier taxes from their respending that is normally concentrated in the local economy.
without rule 7, Ford and national net revenues for manufacturing in each country: (with itemized personal direct income taxes collected from manufacturing decision)
Canadian Manufacturing: Canada $-200, USA $300M, Mexico $5M, Ford $595M, Personal C $250
US Manufacturing: Canada $50M, USA $180M, Mexico $5M, Ford $515M, Personal U $120M
Mex Manufacturing: Canada $50M, USA $300M, Mexico $-25M, Ford $525M Personal M $30M
It is advantageous for Canada (high tax rate country) to "sponsor" exporters with high tax rates even when it means significant subsidies to those companies. The net tax revenue to Canada (and other 2 countries) is the same whether Ford manufactures anywhere, but the calculation excludes the indirect multiplier tax revenue that results from local spending.
So, there is no need for rule 7. Even if Canadian workers all bought imports instead of local products, the exporters are taxed in Canada, and so all of the Canadian (non travel) worker spending is taxed in Canada. Whether a company only exports or simply wastes all of its capital, it does not matter to the society's revenues, because all of its expenses and waste will go towards offsetting (personal and corporate) tax revenue items.
From Ford's perspective, there is a significant advantage to manufacturing in the highest tax country. But other country's tax policies do not affect any other country's direct tax revenue. It can still make sense for Ford to have local operations in each country for example to manage transportation costs, spur local demand and have local retail/dealership operations.
Factors determining optimal national tax policy
Under
natural tax policy, higher tax rates causes inflationary pressure on
wages, and attracts production which also pressures up wages. These
issues have meaningless consequence to the host country, but it affects
the operational costs of a company that may will to produce there.
For
example, if Canada had a 50% tax rate, but universal healthcare and
$15k UBI, and the US had a 30% tax rate, no UBI, and employer funded
healthcare, and a good entry level job has $35k after tax pay:
- in
UBI Canda: $70k salary ($35k cost) gives $50k after tax income with
health coverage. $40k salary gives $35k after tax pay. Perhaps UBI
makes people less desperate for work, and so a salary between $40k and
$70k is needed to qualify as a good/attractive job.
- in non-UBI USA: A $50k salary gives $35k after tax pay, and an additonal $10k
health insurance benefit must be paid for. Total of $60k expense. $42k
in after tax expense.
Even If Canadians only want to
work for $70k, its less cost for Ford to hire them, and they make more
after tax than their US counterparts. If too many companies are
producing in Canada, then workers will be scarce and they may need to
produce elsewhere.
Countries that want to attract
imports, unemployment/wage desperation, tourism and create an isolated
economy could prefer low tax rates. Generally, countries that are
tightly controlled by groups that can channel national wealth to
themselves.
Sales vs income taxes
This systems resembles slightly a pure sales tax system, in that GST/VAT systems generally have input credits. Some people advocate moving away from income tax to a purely sales tax model. Those suggestions are poorly considered.
Differences between sales and income taxes:
- Employee salaries are not subject to sales tax, and so are not deductible by employer. Unreasonable incentive for automation or outsourcing.
- Primary housing rent, non-sugary food are generally exempt. Both Landlords and food industry shouldn't pay taxes?
- Promotes a thriving non-taxed secondary market that attracts other non-taxed sales. And promotes shopping tourism outside the jurisdiction.
- Taxes savings rather than income. The transition from income to sales taxes is a gift to earners, and punishment to those with savings who previously paid income taxes to accumulate those savings.
The only case for sales taxes is that it captures some revenue from those who earn untaxed income.
International retail transactions
Natural tax policy can work simply with international trade. A simple list of each country's tax rates is all that is needed. While a sales tax system is not generally recommended, price+tax itemization works effectively for international trade.
In the previous hypothetical Ford example, if production were 100k cars, then the unit cost would be $5k/car in Canada (2.5k after tax), $4k/car in US (2.8k after tax), and $3k/car in Mexico ($2.7k after tax). A car produced in Canada can be sold for $2777 in Mexico ($2500 / (1 -10%) tax) to break even with costs. Or $5000 in Canada. A car built in Mexicdo can be sold for $5400 in Canada to break even, or for $3000 in Mexico.
To avoid calling it a sales tax, a revenue tax rate can be applied to each customer country. The formula is 1/(1 - taxrate). In our example, Canada 100%, USA 42.86%, Mexico 11.11%. A retailer in Canada who wishes to resell a product that he paid $5000 for, with $500 after tax profit margin, offers it for sale for $3000. The appropriate revenue tax percentage for the customer's location is added to the sales price, and is owed (by seller) to the customer's jurisdiction. $6000 sales price in Canada, $4285 in US, $3333 in Mexico.
There is no effect on multiple hop resales. A buyer in Mexico that wishes to resell the item at break even also lists it for $3000 + revenue tax
An investment example
Imagine Tesla Motors doesn't exist and you will create it. You must decide where to incorporate its HQ, and where to do initial design work, and eventual production. The same 3 countries as the Ford example are considered with respective 50%, 30%, and 10% flat tax rates.
If you need $1B in capital, whether its your own or other people's money, in Canada, the investors would pay in only $500M, in US $700M and in Mexico $900M (investor consortium can be multinational, only the HQ location matters). For HQ location, Canada's higher tax rate offers significant advantage in lowering the needed investor recruitment effort.
In deciding where to produce, the same advantages the Ford example had advantage Canada. Lower after tax-credit expenses. Deciding where to focus sales does create advantages in targeting lower taxed countries. Though, this is always secondary to whether a country has buyers able and willing to purchase your product. Somalia may have 0% tax rates, but that doesn't make it by that fact alone, an attractive dealership location.
If/When dividends are paid, the taxes are owed in the jurisdiction of the company's HQ. $100M in dividends (10% payback) costs the company (dividends are as tax deductible as other cash outflows) $50M with Canada HQ, $70M if in US, and $90M if in Mexico. Investors (after 10% surtax + local HQ taxes) receive $45M if the HQ is in Canada, $63M with US, and $81M. In all cases, the after tax ROI dividend rate is 9%, and equal to 90% (due to 10% surtax) of the paid 10% dividend ROI.
A few years pass, and you agree to sell the company for $3B. Good call, electric cars are a fad. There is a 10% surtax on the $2B profit ($200M). The remaining $2.8B proceeds are fully taxed according to HQ location. $1.4B after tax in Canada, $1.96B in US, $2.52B in Mexico. In all cases this is a 180% after tax ROI, equal to 90% of pretax 200% ROI.
If the buyers wish to move the HQ from Canada to the US, they repay the tax refunds they received in Canada ($1.5B on $3B purchase) to Canada, and then receive the US refund rate ($900B) from the US government. HQ relocated, and US tax rates apply on further dividends and capital gains from the investment.
The tax haven problem becomes perfectly solved
There is more of a reason to invest in higher taxed jurisdictions. And if you prefer not to pay high priced foreign lawyers to forward your mail, its more convenient to locate your company where you and your sales are.
Even if Panama or Bermuda doesn't sign up to the international tax harmonization treaty, and have 0% tax rates, there would be no reason to set up shell companies there other than hiding your bribery and embezzlement funds.
The reason this works is that taxation is moved from Corporations to investor hands, and eliminates all possible international tax arbitrage by expecting tax collections to come from sales, and does not track distortions instead of cash flow.
If there is a payment from a Panama company to a Russian entity, for whatever reason, it is taxable to the recipient and so incentive to ensure it is tax deductible to the payer.
Tax harmonization with complete sovereign freedom over each tax code
A flat tax does not need to be regressive. A universal refundable tax credit (UBI) automatically creates net tax rates that progressively increase with income even though a single marginal tax rate applies. The higher the refundable tax credit, the more progressive the tax system.
There is no obligation for a country to eliminate any non-refundable tax credits, but every country knows precisely how much each non-refundable tax credit costs its revenue, and knows exactly what an equivalent refundable tax credit amount that would replace each. Non refundable tax credits are inherently regressive because there is usually an income or spending requirement to qualify for them.
Countries can keep their social program budgets and other budget components, or replace as many as they can with a sufficiently large refundable tax credit that obviates away the need for the social programs they replace. UBI directly eliminates poverty, and so the savings from social program cuts can contribute funding for it, even though the main funding comes from a reasonably high flat tax. Every philosophy ranging from contempt of the poor or rich to rewarding disinvestors vs investors, can be accomplished by adjusting the flat tax rate and universal refundable tax credit.
On the corporate tax side, the payment of tax refunds for accumulated losses can get delayed or paid in installments. Similarly for investment credits. Rule 7, though it was discouraged, is a permissible option. The case for these payment impediments has to do with fears of tax (revenue) evasion
One way to set these is to start with the appropriate tax rate your society feels the top earners should pay. If France, thinks that should be 75%, then that is an entirely workable (probably) option. That rate becomes the flat tax rate on everyone's income. With that rate set, any country is able to calculate the refundable tax credit it can afford with its operational budget. In the hypothetical French 75% flat rate scenario, it could support a UBI level well over $30k.
A better way to set these rates is to first start with the UBI level that comfortably eliminates the most costly social programs, and then set the flat tax rate accordingly. These rates can be refined continuously as part of the annual budget process. This is the approach I've used in setting up
Canadian tax plans for UBI. Though instead of attempting to mirror the existing tax code, a flat tax is preferrable because it doesn't change much for individuals, but completely prevents arbitrage with corporate cash flow.
Perfectly solves nationalist trade tensions and job thirst
Natural tax policy taxes where the revenues occur. Sellers pay the tax in the buyer's country for the full value of the revenue. Producers get expense tax credits in the production country's jurisdiction. There is no complainable reason to object to imports.
In terms of job promotion, currently in Ontario, hiring someone at $40k salary (lowest marginal personal tax rate), costs $43k pretax with employer payroll contributions. Ontario small business income taxes are 15%, and so after tax cost is $36550. Hiring a machine or subcontractor instead costs the company only $34k instead. For that $36550 after tax cost to the company (less than 9% tax rebate), the employee only receives (excluding health premiums and tax credits) (20.5% income taxes and 7.5% payroll taxes) $28800, whereas a subcontrator or machine seller would receive the full $34k cost as net benefit.
Where job creation is the loudest political talking point, the most obvious point to challenge is why the tax code punishes business for hiring employees (creating jobs). Equalizing corporate and personal tax rates is the most obvious job promotion strategy, and raising tax rates is the most obvious investment (includes employee hiring) promotion strategy.
If politicians want their citizens and economy to produce more they should raise taxes. The effect on purchasing can be minor. Raising taxes can superficially encourage companies to raise prices in order to meet the existing profitability rates. But they can superficially just as well keep prices the same to increase market share. Higher income taxes can never turn a pretax profit into an after tax loss. But with NTP, companies can now easily avoid all taxes by paying dividends. So, a company that makes something that costs $40, and sells it for $50, then regardless of the tax rates, the company can pay no taxes by paying the $10 profit to shareholders, and so has no reason whatsoever to raise prices to meet "after-tax profit goals".
Political fights over tax evasion and tax rates are mendacious
If the right wants industrialism and job creation, they need to support raising taxes. If the left wants job creation and poverty elimination, they need to support the destruction of needless bureaucracies that oversee conditional poverty assistance and unnecessary labour regulations, and replace them with a refundable tax credit sufficient to eliminate poverty and equalize the bargaining power between providers and purchasors of labour by letting both sides freely say no.
There is a simple and obvious solution to whatever evils you can imagine from tax havens, and tax whinning. No excuse not to adopt them. Explicit support of systemic corruption explains how our tax systems are the way they are.
Tax plan is not that harsh on Republican Champions
- All corporations have a simple path to paying 0 net tax. Dividends. Dividends can create refunds in future years for taxes paid in past years.
- Rather than complain about Corporate tax avoidance behaviour, it chanels it into simplistic productive motivation, that also places hiring on an even investment competitiveness.
- The investor class though they pay much higher rates, are paid with untaxed corporate funds (much higher than post taxed), and more importantly, motivates corporations to repay shareholders on their investment rather than to avoid doing so.
- Fairly low tax rates can achieve social funding. If all existing tax credits are eliminated, net social revenue can be modelled as tax rate * (Personal income-per-adult less universal refundable tax credit amount) + (10% * investment profits (including banks)). The redistributive nature of a refundable tax credit will further directly increase consumer spending.
- A simpler existing tax treaty compatible treatment of corporate profit and investor income is to instead of taxing everything in company's jurisdiction, tax it all in investor's jurisdiction. The consistency is more important than the jurisdiction.
The General Tax model for an economy
Even today, in almost every country very little tax revenue is raised from corporate taxes. The profit accountability system permits enough deductions to reduce taxes paid. With the innevitability of bankruptcy, and the possibility of selling tax credits in bankruptcy, every corporation has an expected 0 cummulative tax rate anyway.
Under Natural Tax Policy (NTP), the following transactions have 0 net tax benefit/cost to the government, and a perfectly reasonable transaction structure is to have the receiving party to an exchange pay the tax due to the paying party:
- Business to business trade and investment.
- Investor to business investment
- Importer business to foreign company payments
Transactions that are taxed, and can have government remittances at the time of transaction:
- Consumer purchases.
- Returns of and on investments (At 10% of profits). But the return itself is tax neutral.
Although individuals can adjust their tax payable each year to be their consumer spending (by making deductible investment decisions) Those investments create a corporate tax obligation, and so Personal income forms the actual tax base.
The deductibility of dividends encourages corporations to declare more profits, and increases personal income by encouraging them to pay more dividends. The long term modeling contribution is to model future personal income as personal income + corporate profits, and then to add 10% of corporate profits as social revenue in addition to the flat tax on personal income. In an environment, where a perpetual corporate profit increase is expected, then this underestimates tax collections, as it does not count the 10% on capital gains.
In the
US, Personal income is 15.7T, with 2.1T in investment income.
$6.8T in Corporate income. Lets use 22.5T as new personal income, with 6.8T as "10% top off". A 7% flat tax would provide $2.25T in non transfer/social service (but including healthcare) programs (slightly more than current levels). An additional 20% flat tax would fund $4.5T needed to provide 300M adults with $15k UBI. Regardless of UBI level though, the average net tax rate would be 7%. A 27%-30% flat corporate and personal tax is all that is needed to meet US bugetary needs including $15k/year UBI.
