Funny, they always seem to go one direction: out of the U.S. and away from the developed world’s highest corporate tax rate . Bloomberg reported this week on a possible mega-merger of Pfizer and U.K.-based AstraZeneca. CNBC speculates that tax has a lot to do with it: Pfizer’s got an estimated $70 billion in cash, much of which is parked overseas. An acquisition of London-based AstraZeneca would put that cash to work without bringing it back to the U.S., avoiding a gigantic tax bill for Pfizer. The opportunity to lower its corporate tax rate. SunTrust analyst John Boris points out Pfizer pays the highest tax rate—28 percent in 2013—of all of its peers.That compares to 17 percent to 18 percent for Bristol-Myers Squibb and about 20 percent for AstraZeneca, he said. Reincorporating in lower-taxed locales, like Ireland, has been a hot trend among drug companies in the last few years (see: Actavis /Warner-Chilcott and Perrigo /Elan), and Pfizer could be seeking a similar path. Cancer drugs. AstraZeneca’s got a pipeline of experimental medicines in a field called immuno-oncology, which aims to harness the immune system to fight cancer, one of the most important fields of cancer drug development. Bloomberg also reports that Canada-based Valeant Pharmaceuticals made an offer for California-based Allergan Inc., maker of Botox. Canada’s corporate tax rate is 26 percent, versus 39 percent in the U.S. The U.K. will soon lower their corporate tax rate to 20 percent. Some of the more recent corporate exits from the U.S. include Applied Materials , Jim Beam , and potentially Walgreens . Follow William McBride on Twitter
The California Senate is considering SB 1372 , which would tie the corporate income tax rate in the state to the ratio of pay of a company’s CEO compared to its median worker. While proposals to cap CEO pay are not entirely novel , this is the first such proposal I know of to attempt to do so through the tax code. Proponents of the bill argue the measure would push “companies to put less money into the hands of their CEOs and more into the hands of average employees.” But I’m not convinced the outcomes would be as proponents intend. The bill would create a sliding scale detailed here: If the CEO to median worker compensation ratio is The applicable corporate income tax rate is Over zero but not over 25 7% Over 25 but not over 50 7.5% Over 50 but not over 100 8% Over 100 but not over 150 9% Over 150 but not over 200 9.5% Over 200 but not over 250 10% Over 250 but not over 300 11% Over 300 but not over 400 12% Over 400 13% NOTE: This special formulation would only apply to publicly-traded corporations, and CEO compensation would be calculated based on SEC definitions. Currently California taxes corporate income at a top rate of 8.84 percent, the 10th highest rate in the country. If enacted, this proposal would raise the top corporate rate to 13 percent, which would be the highest in the country. When added to the 35 percent federal corporate income tax rate ( already the highest in the world !), companies would face a top marginal rate of 48 percent, which doesn’t really pass the laugh test for competing in a global market. Secondly, this proposal would disproportionately affect retail companies where much of the workforce is comprised of sales associates in entry-level positions. Using median worker compensation as the denominator for corporate tax liability hurts business models that are primarily composed of large numbers of customer service representatives ( JC Penny, Abercrombie and Fitch, Starbucks, and other popular employers ). These businesses would be less competitive at attracting capable CEOs if they were forced by tax law to cut executive wages in half. In a broader perspective, state corporate income taxes are seriously flawed, mostly because policymakers ask them to accomplish far more goals than they possibly could. States use special provisions to try to incentivize job creation , spur research and development , boost investment , preference American manufacturing , change business geographical location , the list goes on. This proposal, if nothing else, adds “promote wage equality” to that list of tasks for the corporate tax code. Taxes at their best should have one purpose: raise revenue for government services. This proposal steps in the opposite direction and tries to use the tax code to change behavior. More on California . Follow Scott on Twitter . [Update: You shouldn’t expect this bill to get far. The bill has seen hefty formal opposition from no less than 19 entities, and formal support from only the California Labor Federation.]
Mayor Landrieu wants an extra $38.6M from taxpayers
(Click on the map to enlarge it. Reposting policy ) This map presents top individual income tax rates in each state for 2014. Income taxes are a major, and often complicated, component of state revenues. Furthermore, unlike sales or excise taxes which individuals pay indirectly, income taxes are levied directly on individuals, meaning that income taxes figure especially prominently in any discussion of tax burdens and public policies. Income taxes are structured in many different ways throughout the states. Some are flat systems with one rate for all income, others offer progressive systems taxing different levels of income at different rates, while some states have no income tax at all. These taxes also change: since 2013, five states (Kansas, North Carolina, North Dakota, Ohio, and Wisconsin) reduced income taxes and one state (Minnesota) increased income taxes. For the most up-to-date data available on current state tax rates and brackets, standard deductions, and per-filer personal exemptions for individuals filing singly, see our report here .
Lamenting the fact that Walgreens is considering moving its headquarters to Europe, Dan Smith (“Close Corporate Tax Loopholes” April 20, 2014 ) makes the claim that corporate profits earned and kept overseas are “not being taxed.” Mr. Smith demonstrates his lack of understanding of how U.S. corporations are taxed here and abroad. While it is undoubtedly true that corporations use tax planning techniques to minimize their taxes, they by no means escape taxation on foreign earned income. When a corporation earns income overseas, it has to pay the corporate income tax to the country in which it does business. IRS data shows that corporations earned more than $470 billion in profits overseas and paid more than $120 billion in taxes to foreign countries in 2010. A sum much larger than nothing. Most of these profits were earned and taxed in European countries like the United Kingdom, the Netherlands, and Luxembourg; not what I would call “tax havens.” Even more, the U.S.’s “worldwide” system of taxation requires that U.S. multinationals pay the U.S. corporate income tax on this income as well. When a corporation brings this income back to the United States, the IRS tacks on an additional charge to make sure all corporate income is taxed at our high 35 percent rate. The U.S. is one of the six countries in the developed world that still charges corporations a toll for wanting to bring investment back to their home country. These are important facts we need to understand if we are going to have an honest discussion about reforming our corporate tax system.
Inequality is a hot topic these days. Everyone seems to want to write about it. The launch of TheUpshot, the new project from the New York Times, included a story on the wealth of the middle class , the Times Sunday Review had a column on inequality and economic mobility , and Matt Yglesias can tell you “ everything you need to know ” about it. But in the discussion of the cause of all this inequality, it’s sometimes good to look beyond all the data and rely on economic intuition. From a Ball and Mankiw paper : “The fall in the capital stock affects factor prices: wages fall, harming workers, and the returns to capital rise, benefiting capital owners.” Mankiw and Ball are talking about the crowding out of capital caused by a deficit in this scenario, but the effects are the same. When the service price of capital goes up and investment goes down. When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages. Second, because there is less capital available the available capital is more valuable, which causes the return to capital to rise. The effect of this over time is that wage earners make less and capital owners make more. Our current tax code exacerbates this problem significantly through its non-neutral bias towards consumption over future consumption (i.e. saving). The evidence is fairly clear that America is a nation that likes to consume : 72 percent of our GDP is consumption. We are second on this measure behind only Greece at 75 percent. Meanwhile, our ratio of investment to GDP is second to last, just behind the United Kingdom, at 16 percent. Low levels of investment can have a lasting impact. Saving and investment drive an economy forward. There are many steps we can take to fix our predicament – improved K through 12 education, fewer barriers to starting businesses, etc. – but because taxes have a direct impact on the cost of capital and the amount of investment, tax reform may be the best place to start. In many respects, countries in the OECD have recognized the damage caused by taxes like the corporate income tax and have taken action to lower the tax burden on investment. Since 1980, the OECD average corporate tax rate has gone from around 50 percent to about 25 percent today . Today, the U.S. has the highest corporate tax rate in the OECD , the sixth highest capital gains tax rate, the ninth highest dividend tax rate, and the 25th worst cost recovery system . Additionally, the U.S. tax code double taxes investment, first at the corporate level and then the shareholder level, and has the most progressive tax code in the OECD . All these factors contribute to a high tax burden on investment in the U.S. It’s important for that to change. Reforms to improve the tax system and lower the cost of capital would mean good things for American workers. A cut in the corporate and top individual tax rate to 25 percent would grow the economy significantly and lead to large increases in wages and investment . If we takes steps to lower the cost of capital through full expensing or tax cuts, we will see two things happen. First, more people will decide to invest instead of spend, which will lead to a larger capital stock and higher wages. Second, because more capital is available, the existing capital will become less valuable than before, and returns to capital will shrink. The effect overtime is that as the cost of capital declines, wage earners will earn more and capital owners will earn less. What would that do to inequality?