Wednesday, July 26, 2017

25/7/17: Of Corporation Tax: An American Lesson

Yes, 35% statutory tax rate in the U.S. is delivering magic results... and yes, corporations do pay taxes...

Meanwhile, taxes on labor and income share of total tax take is climbing up primarily due to the 'invisible' (to households) payroll tax. Which, of course, goes hand-in-hand with lack of take home pay growth. Now, extend this picture into the foreseeable future:

  • Estate taxes will go up as Baby Boomers finally succumb to old age; but that increase will be short lived, because subsequent generations have no real savings (back to that payroll tax thingy). Thus, having risen at first (as early cohorts of heirs to Baby Boom Generation start cashing in), estate taxes will fall (as subsequent generations of heirs start selling assets into depressed markets - supply up, demand stagnant... what happens to prices?);
  • Corporate Tax returns will continue trending down because, let's face it, even Canada is now offering a lower tax environment than the U.S.
  • Which means either Payroll Tax or Income Tax will have to rise to keep Washington swamp well lubricated. Payroll Taxes face uncertain future due to (1) declining or anaemic labour incomes/wages; (2) robotization and automation; (3) Corporate Tax competition, etc. So it is doubtful that Payroll Tax can take the slack created by future declines in other tax revenues. Which leaves us with only two feasible alternatives: cut spending or raise income taxes.
Problem is: you need to have income in order to pay Income Taxes. Another problem is: you need guts and political capital to cut spending. Care to tell me where all of this is going to come from?..

Of course, there is an alternative: cut tax rates and close loopholes, and - better yet - ditch the idea of bogus progressivity (see the result of that one above) and go for a flat tax. To offset that, cut wasteful spending. You will likely see higher yield across all three tax headings - Payroll, Income and Corporate. And you might end up with a new generation of growing incomes, savings and investments to at least cushion out the sell-off of inheritance assets from the Boomers. Maybe.

Of course, for that, you still need guts and political capital. But at least you will have some hope at the end of the political bloodbath...

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