Let's walk down this rabbit hole:

So you want to tax corporate profits. Well, trouble is, it's easy to hide profits. For example, interest payments are subtracted from profits, which allows investors to lend money to corporations as loans, and the interest is only taxed by the recipient, but if you lend money to the corporation by purchasing equity, that is taxed twice. This asymmetric tax treatment incentivizes taking on debt and thus financial fragility and short-term thinking. OK, you say, let's treat interest and dividends the same. Then you have this issue with massive executive compensation, which is untaxed as it is treated as an expense. You'd like for that to not be tax-exempt as well. Thus you decide to tax value add -- that is revenue net of your cost of goods. That way, you catch cheaters, since if corp A reports something as a cost (payment to B), then B better record it as a revenue. B can't hide. Except now comes the foreign sector. What if B is a foreign company? There's the rub. One option is to say the foreign company also has to pay you taxes based on what it sells to A. This would effectively put an end to all the shell company shenanigans. To be fair, you can give credit for income paid to other jurisdictions so you don't end up double-taxing (like we do), but that's minor. So now you are happy with your system. You survey the landscape and what have you accomplished? A sales tax! This is just a value added tax, or VAT, which is another form of sales tax. But sales tax is regressive! And very unpopular. So there is this problem where Americans don't want a national sales tax of, say 20%, but they do want a corporate profit tax of, say 40%. And they are really angry when they see the effective corporate tax being so low, say 5%.

This reveals a cold truth, which is that corporations are effectively pass through entities for the human owners of the corporations. So why tax them twice? Well, because we have so many tax loopholes and such large trade deficits that 40% of our corporations are owned by foreigners that don't pay US taxes and 40% are owned by pension funds and tax-advantaged retirement accounts so that only 20% of US equities are subject to any tax at all. So this thrashing around about corporations reveals yet another uncomfortable truth, which is that our massive outsourcing has resulted in an erosion of the tax base just as much as it has destroyed middle class jobs.

This brings us back to a new variant of the old trilema, which is that you can't have free flow of capital (or equivalently, trade) across borders, a floating currency, and your own interest rate policy.

You can only have two of these. Except the tax version of this is that you can't have free flow of capital (that is trade), a floating currency, and your own corporate tax policy. The best you can do is a national sales tax for goods sold to your own citizens. If you try to tax corporations, you will run into the two-headed hydra that your corporations are owned by overseas investors and that your corporations have set up overseas businesses that sell them valuable inputs, so valuable that all the value is routed overseas.

So what happens is people create a tax policy that tries to also avoid tariffs on trade and foreign capital flows, and then they are shocked when corporations arbitrage that away.

Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. In order to pay the money to shareholders they have to repatriate them and pay corporate income tax on the money, and then the shareholder has to pay tax again on the dividend or the capital gain from the buyback.

Or they can leave the money where it is, not pay any of those taxes and invest it in some index fund from there. But then the money is stuck inside the corporation, and gets invested in some index fund instead of potentially going to some higher risk/reward investments that some of the original shareholders would have chosen.

> On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day.

COVID-19 isn't a rainy day, it's a once in a century pandemic. Most companies have never made enough money to be able to survive it, and the ones that did still shouldn't be hoarding it just in case. Systemic problems get solved through systemic actions, e.g. lowering interest rates or sending stimulus checks. To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with.

> Making a better product also doesn't necessarily lead to profits.

Making a worse product in a competitive market has a strong relationship with going out of business.

> There's a far greater correlation between monopoly power and profit.

But that's an independent problem. The solution there isn't to raise taxes, it's to break up monopolies.

The problem is not that they stop participating in the economy, the problem is that higher taxes induce more economically inefficient behavior solely for the purpose of tax avoidance. Corporations will engage in whatever contortions necessary and waste enormous resources and engage in otherwise-irrational activities with billions of dollars behind them solely for the purposes of reducing taxable income. If you can spend a billion dollars to save $1.2B in taxes then corporations will do it. So corporations hoard assets in offshore subsidiaries because repatriating it causes it to be taxed and issuing it as a dividend causes it to be taxed again, but doing neither allows the shareholders to take the profit as share price appreciation which can be tax deferred indefinitely and even then comes in at a lower rate. Result is that corporations like Apple end up as de facto mutual fund managers even though their business expertise has absolutely nothing to do with that. The amount of inefficiency caused by making poor (or just excessively conservative) investment decisions with billions of dollars per corporation is difficult to even imagine. Then there is the matter of jurisdiction shopping, so again, the problem is not that they stop engaging in economic activity, the problem is they move across borders, and each instance of that causes you to get 30% of nothing instead of 20% of something, meanwhile the businesses that stay are put at an economic disadvantage (or reduced economic advantage) against their foreign competitors.

>You also don't seem to take into account elasticity, the decreasing utility of money, or any notion of optimizing social utility.

That's because we're discussing business growth. And D&S have the opposite problem: They try to account for utility to the taxpayer (though they go on to assign that value to zero for high income earners), but they never account for the investment value of money. When a business owner pays more in taxes and in so doing has only enough earnings to reinvest into opening three new facilities instead of four, the owner may not have any change whatsoever in standard of living, but the employees who would have worked at the fourth facility might have a different opinion.

D&S also calculate the "optimal" tax rate as the one that generates the most revenue from high income earners, which ignores the essential question of whether the government can make more economically productive use of the money than the private sector. They punt on the question by assuming that because high earners have a lower marginal utility for the money than low income earners, shifting the tax burden at any given spending level toward high income earners will always result in a net gain in social utility, but that falls apart pretty quickly because the lowest income earners already have a negative effective tax rate. So that assumption devolves into the idea that redistribution of wealth has positive social utility and we should always take from someone who has more money and give to someone who has less money to take advantage of the social utility gain, i.e. naked Marxist rhetoric with no economic basis.

>If I'm Bill Gates, I could not give enough of a shit that you taxed from me $5k dollars, or even $500k. But, use that to pay for nine or ten heart surgeries, and suddenly social utility is increased by, I would guesstimate, 100x (total lifetime earnings of those ten people, starting after surgery).

This is a perfect example because of what Bill Gates actually does with his money. If you take $500k that could have gone to the Bill and Melinda Gates Foundation, Bill Gates may not give one damn about the money, but what about the people he was going to buy mosquito nets for? And what if the government spends the money building F35s that don't fly rather than on heart surgery?

>Also, there's not really any empirical support for a inverse relation between business taxes and economic growth. It's just one data point, granted, but we could take as an example Bush's years. Massive tax cuts, but very poor growth.

Why are you assuming the result of low tax rates would be seen immediately? A business doesn't always decide to build a new facility when taxes change, they just decide where to build the new facility based on what prevailing tax rates are. You might also want to look into Chamley and Judd (as discussed in D&S at 14), regarding the consequences of taxing investment earnings that would have been reinvested. The short version is, because investments collect interest with exponential growth, taxing would-be investment capital has an exponential cost to the economy if future earnings would always be similarly reinvested.

D&S go on to discount this because most families or individuals will eventually choose to consume their savings rather than continually reinvesting their earnings forever, but that doesn't really apply when the entity collecting the earnings is a publicly traded corporation, and even for individuals the original reasoning still holds to extent that earnings are reinvested.

Modern tax systems are diverse by design: sales tax/VAT. Excise/sin taxes, income taxes, CGT, employer taxes, etc. The mix is designed to reduce volatility. It's also designed to max out tax revenue while avoid damaging the economy by discouraging things like labour, savings, or other important activities too much. The effective maximum revenue for a country to collect in taxes appears to be somewhere in the 35%-45% of GDP range. After that diminishing returns on taxes kick in. Most euro countries are taxing (or rather spending) near that max. So, they can't afford to let corporate taxes.

Problem is that corporate tax is unavoidably problematic. Large multinationals can arrange their activities (not just their paperwork) depending on taxes. I doubt an single country want to create a tax the ensures large companies avoid setting up local subsidiaries within their borders. The end result is a different set of rules for the large and/or sophisticated that is more lenient than the rules on small companies.

Personally, I would rather see corporate tax abolished than see it applied in such a way that it discriminates against small companies.

The real problem is that the corporate tax shouldn't exist. It's too easy to fuck with and manipulate a profit tax by being creative with what counts as revenue and what counts as expense. And tax incidence studies have repeatedly shown that the burden of corporate taxes fall disproportionately on labor, not capital. The better idea would be to eliminate the corporate tax entirely, taking the world's entire corporate tax avoidance scheme with it, and instead tax personal income, dividends, and capital gains at higher rates. It would actually be more progressive and far less avoidable, and mountains less complex.

That said I found the arguments in this document missing some important points.

They don't clearly separate the benefits of corporate taxes from a domestic vs international standpoint. These are two very different issues. On the international side they talk about the race to the bottom where counties are attracting companies through lower tax rates. They suggest this is a negative trend but don't offer solutions - because it's a complex issue with no easy fix. Sovereign countries can chose their tax regime and therefore there is an incentive for some to become tax havens. As an individual country it will hurt you to raise the corporate tax rate since there is a higher incentive for companies to move profits. So are they suggesting all counties agree to raise their corporate tax rates? It's not clear. Countries are obviously aware of this issue and are working with the OECD to draft solutions.

On the domestic side they gloss over the fact that most countries work to have an integrated tax system. That is, no matter how you structure you taxes when income flows to an individual the total tax paid on that income should be the same. So having a corporation (which usually has a lower tax rate than individuals) gives you a deferral of tax. This is to encourage businesses to reinvest.

They claim that if there is no corporate tax then companies will create shell companies and put income there. Tax authorities aren't stupid. Even now it would be beneficial to do that since corporate rates are lower than personal rates. Thats why if the company isn't earning business income (I.e. you just throw your personal wealth there invested in passive income) the tax rate of the corporation is bumped up to the highest personal rate on that income. So doing what the document suggests would be illegal.

The only real argument for changing the corporate tax rate should be (from a domestic standpoint) based on the deferral. That is, do you think companies should pay less tax to help grow their business faster and only pay tax when the owner stops reinvesting in the business?

Obviously this is a complex topic and I think that this document glosses over alot of that complexity. Just to note that I'm most familiar with the Canadian tax system so that's what I've based the domestic discussion on. However, all countries have similar tax policy objectives and should have similar rules in place.

actually corporate taxes are a pretty controversial topic among economists. it's not considered to be a particularly efficient tax, and it is unclear who ultimately bears the burden of the tax.

The big issue is with "just a flat rate that everyone pays". What do you pay that rate over? Big corporations manage to pay that rate over nothing. Generally those corporate taxes are paid over profits, so corporations avoid taking profits in countries that tax them. They sit on their money, pay it out as bonuses to executives, and take their profits in tax havens.

The issue isn't the tax rate, it's the loop holes. It's that the amount that's taxed is easily manipulated. Instead of easily manipulatable profits, the tax should be levied on something less easily manipulatable. Like revenue. Of course that already happens: VAT taxes, only because you pay them on all products, they are effectively paid by consumers, not corporations.

But how about allowing corporations to deduct their local external costs from their revenue? Not easily manipulatable foreign external costs, but simply the costs made in the same market as where the revenues come from? Then you're effectively still taxing profit, but tied to the local market, cutting tax havens and internal trickery out of the picture. A company on the other side of the world selling in your country but not making any costs there; no labour, manufacturing, rent, etc; would pay tax over their entire revenue, whereas a local shop that has does have all those costs, and therefore cannot help but invest in the local economy, gets to deduct those costs and pay less taxes.

I think that could do a lot to even out the imbalance and make the playing field a lot fairer.

Personally I'd rather we started treating dividends and even capital gains as normal income and eliminate corporation tax.

You nailed it. We need a system where "corporate taxes" should be entirely at the shareholder level, and corporations should be allowed to propagate tax liabilities all the way to individual shareholders (so that holding entities aren't taxed). Then we should apply a progressive income tax on any capital gains made by shareholders. That would make our the system fair and economically efficient.

I would like to see an across the board lowering of the corporate tax rate, remove the capital gains exception counting all income as income, and making up any losses through a VAT. This would go a long way to decreasing the ability to gain the current system.

The idea is always just to tax methods of getting income out of a corporation instead, (income, dividends) but there's a problem with this idea.

There are infinite ways to get your money out of a corporation.

If you start off with: power is power all forms of power can be transferred into money somehow

Then you realize that allowing someone to put their income into a company and only pay tax on DIRECTLY taking it out, there's hundreds of ways to get around that.

My company employs your son, then you give me a kickback in whatever form My company buys from your company, you give me a kickback somehow My company invests in something related to another investment that I hold and pushes the value of it up. My company employs me on minimum wage for 80 years instead of employing me on a high wage for 40 years, halving the tax that I pay through income My company employs my own son, girlfriend, relative

If I have access to and control over an entity that can swing a million pounds around you can guarantee I can find an indirect way to get paid from that which you can't prevent/tax/foresee. The only reasonable way to mitigate that is to slap some level of tax on me putting money into my proxy.

- though I didn't mean to imply that the entire tax gets offloaded downstream. That was clumsy.

My point is that taxing corporations without inordinately harming their employees and consumers' standards of living is impossible. Even worse, it grants a competitive edge to established corporations over lesser competing firms, which lack the connections or resources to navigate that tax code as efficiently.

It just isn't healthy for the market or effective at its purpose. If we're serious about maintaining healthy competitive markets and a public with purchasing power, we should consider different options.

A country shouldn't tax the things it would like to encourage. In this case, that companies re-invest and not pull the funds out to pay investors.

Capital gains tax should probably be mentioned. Why is it a much lower rate than income tax? Why not talk about that?

Strange also that the article doesn't really target one specific part of the tax code - they don't mention any loopholes at all. If they'd like to see a change, name exploits.

The article is outrage porn - not trying to inform, or make a specific change. It's simply trying to get clicks and shares.

It's really a shame to see the new york times go this route.