The tax plan debate

Sort of verbatim

Gentle readers,
Below is a quick and dirty cut and paste recap of the debate that raged through the email list yesterday. Apologies to those who felt besieged by a plethora of emails. To those who waded in, thanks for your passion.

Please add additional thoughts to the debate by posting comments below.
Thanks,
SEW




Ending the Corporate Tax Will Create Jobs
BOB MARCELLUS TIMES-DISPATCH COLUMNIST
Published: January 17, 2010
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Virginia has the opportunity to act decisively to create a more just, productive, and economically competitive environment. To reach this goal, I advocate the complete elimination of Virginia's corporate income tax.
We need to take bold action to protect and create jobs here in Virginia.
Our combined federal and state corporate income tax rate of 41 percent (35 percent federal plus 6 percent state) is now the highest in the world -- surpassing Japan and communist China -- and is double the average rate in developed countries. While other countries have been slashing this tax, America has been asleep at the switch.
A first misunderstanding is to suppose that rate cuts lead to lower tax receipts. Nothing is less true. Investment and work behavior change when taxes are less onerous. Everyone knows this is true, even if they don't want to admit it. But government largely uses a "static" model of tax revenues that ignores human behavior -- something that businesses would never dream of doing.
During the past 20 years, dozens of countries have concluded that the corporate income tax is one of the most economically destructive mechanisms for raising revenue because it destroys production.
While other countries have been cutting corporate income taxes year after year, our corporate taxes have remained the same, destroying our competitive position. Today, many continue to talk about punishing companies that move jobs overseas -- but the more rational course of action is to stop punishing them for staying here.
Countries and regions that have cut the corporate income tax have experienced impressive increases in the rate of new jobs, corporate relocations, economic competition, and new investment. The evidence is overwhelming.
Abolishing this tax, with a date certain 12 to 24 months in the future, creates a "wow" factor for growth while still building tax revenue until the actual implementation. This window buffers state revenue while building the base that culminates in a sustained growth of revenue created by an ensuing 0.5 percentage point to 1 percentage point expansion in the annual growth rate of Virginia's GDP. This roughly translates (on the low end of expectations) to creating new jobs for the entire city of Bristol -- population 17,000 -- every year.
The Congressional Budget Office reported in 2006 that more than 70 percent of the burden of corporate income taxes falls on labor. A European Union study of 50,000 businesses found an even stronger connection to wages -- a 1 percent increase in corporate income tax rates leads to a 0.92 percent decrease in real wages.
It would be easy to criticize eliminating this tax as a give-away to major corporations. But this initiative is so overwhelmingly pro-labor that it is hard to understand why business people have to be the ones to propose it.
National and provincial governments across the political spectrum have been working to cut this tax and have experienced increasing tax revenue as a result. People don't understand how destructive the tax is to jobs, investment, and business growth. They certainly don't understand that labor ultimately pays the highest price. Labor deserves the right to negotiate for this portion of company profits.
While removing this tax will indeed lead to ongoing expansion of the economy, the justification is not just financial but moral: Shareholders should not be double taxed -- they should be able to reinvest profits. Labor should not be deprived of higher earnings.
I note that this stimulus to a state or nation's economy does not discriminate as to industry or interest group. Eliminating the corporate income tax will offer a true stimulus that requires no bias -- you do not have to have a stake in a government-subsidized industry to benefit. The current federal "stimulus" initiatives -- in the form of expanded government spending and income redistribution -- ignore the important difference between market investments of private capital on the one hand and government programs that usurp markets and drain away private investment capital -- or dilute our currency -- on the other.
There is no other long-term method or greater incentive for creating jobs and growing an economy than profits.
No state or nation should need to apologize for restoring the incentive for businesses to grow and become more prosperous. Even charities require the existence of profits in an economy.
The only way to have more jobs and a stronger economy is with a stronger business community. The only stimulus to a bigger and stronger business community is to allow individuals and businesses to take the risk, innovate, and to out-compete others -- while reaping the rewards.
I urge Gov. Bob McDonnell and our elected representatives in the General Assembly to send a bold message and implement this policy with all due haste -- for the benefit of all of the citizens of the state.




Bob Marcellus
President

Richmond Group Fund Co. Ltd

Corporate income taxes may well be a pass-through expense and so may not REALLY be paid by the corporations if levied across the board. If so, then elimination of the corporate income tax may not make much of an economic difference (so long as tax revenues are increased elsewhere, such as on individuals), but it is specious to assert that its elimination will surely promote job growth. If that were so, then there should not have been nearly as much "job growth" back in the 1990's as there was when the American economy was doing quite well, despite a much more "aggressive" individual and corporate tax structure.

The ill-advised 2001 tax cuts rendered the American tax system "regressive" (not "progressive") for the first time, at least since WWII. The larger the gross income, the larger PERCENTAGE of gross income retained after taxes and ordinary living expenses. Middle-class families now retain a smaller PERCENTAGE of their after-tax gross income than do wealthier families. I think that has been a major contributing factor to our current economic meltdown.

I suggest the PRIMARY reason jobs are now suffering is because "mercantilism" (the buying and selling of goods and services mostly at the local-market level) has been almost totally ignored in the "Bailouts," while there continue to be undue emphasis and focus on "capitalism," which cannot create many jobs if the goods produced by "capitalism" (like GM's cars) aren't selling. Most American industry is now run (into the ground) by clueless "bean-counters," and their chickens have finally come home to roost.

Trickle-down "free-market capitalism" is a nonsensical "bean-counter" mantra parroted in rote fashion by most that has served as Conventional Wisdom in America for far too long. The US economy is more truly driven by middle-class "fair-market mercantilism" instead. Jobs won't be created or maintained until middle-class purchasing power is restored.

Cutting federal payroll taxes (FICA--12.4% & Medicare--2.9%, both half nondeductible) instead of cutting corporate or individual income taxes might be a good start, as one Republican congressman has suggested.
H. Watkins Ellerson

Dear Mr. Ellerson
The utter speciousness of your argument is that nowhere do even acknowledge, much less propose replacement of the lost tax REVENUES that will surely result from the proposed elimination of the corporate income tax.
You must have missed a key part of my op-ed noting the increase in treasury revenues by the next budget cycle in each of the three country examples. It’s revenue positive, nothing to “make up” as long as announced 12-24 months in advance of the actual effective date. The analysis of their treasury receipts show no dip in a 20 year period


To imply, as you say "everyone knows,"
Everyone knows that the corporate tax cuts come out labor at this point. Again, you seem to have missed my reference as even the unbiased Congressional Budget Office is noting this negative effect on wages. That’s a lot of bad water trickling down to the average worker. Don’t fall into the trap of analyzing the data statically as opposed to dynamically.

that prosperity will magically "trickle down" from corporate tax cuts generating newfound corporate spending on goods and wages is ludicrous in the extreme. Trickle-down economics has been thoroughly discredited over the years, and that is all you are proposing--more of the same-ol'/same-ol'. You might try suggesting something novel besides cutting taxes on top earners for broad-based economic recovery. The unspoken intent to put Va. government on an extreme "diet" by radically cutting tax revenues won't work. It ain't gonna happen. Ever. That sort of suggestion is rather tiresome. You don't even suggest where state government services should be cut, to reduce the need for those lost tax revenues.
Funny that labor unions and democrats are viewing this as supportive to government spending due to the increase in revenues It has always brought.

You raise the specter of double taxation of shareholders, intending to whip up indignation over perceived unfairness, without providing the economic history of such a policy. Corporations are purely creatures of the legislatures and did not exist prior to about 1500 CE. As the doctrines of limited investor liability evolved for corporations (contrasted with unlimited investor liability of partnerships), the historical quid pro quo for allowing such limited liability was the notion that the corporation, deemed a stand-alone investor-sheltering entity, should pay its own taxes. There is nothing inherently natural or predictable about the limited-liability form of investment. The only "double-taxation" in the corporate form is derived from the dividends paid out to investors being neither deductible from non-pass-through corporate gross income nor excludable by investors when received, thus being a second taxable event. BUT, there is no double tax on earnings retained by such corporations nor on earnings paid out to workers, nor on earnings used to purchase inventories and raw materials, and so forth. The latter are all deductible corporate expenses. One could, therefore, argue with as much credibility as your arguments that a tax policy that encouraged corporations to retain earnings and grow in value might well enrich investors more in the long run than dissipating earnings as dividends. But, I am not making that argument. The corporate income tax may be a pass-through cost of doing business (as I suspect), but I reject the notion that it is somehow "unfair" in the historical context.
It is unfair for many reasons, especially to the average worker. This tax is one of the best examples of “unintended” consequences resulting from what was supposed to be an easy target to increase government spending. .

I will repeat my primary assertion: that the only way to restore our economy, whether measured in Gross Domestic Product or otherwise, is to put spendable "spare change" back into the pockets of the workers and middle class, which was once the bedrock of American prosperity since World War II , but has itself been dissipated in more recent times. It was consumer spending by the workers and middle class that once kept the US economy running, and most workers are, by far, employed by businesses that are NOT publicly traded.
Strangely, it affects non c corps as well for many reasons
Your next statement will likely be “ok, wiseguy, if this is the silver bullet with regards to the best tax to eliminate to spur growth, then why isn’t everyone doing it?” They already are! Note the data “touch points” attachment.

This is a very good idea to mitigate the hemorrhaging in jobs and state revenues. I stand by that statement and the research.
Regards


H. Watkins Ellerson
The argument is far from specious as you assert. You may wish to research the issue more before making that assertion in public. You are welcome to see a copy of the report we gave the Governor which contains clear and convincing academic support from nobel laureates to actual data from countries and provinces that achieved material gains in jobs and GDP growth. It is incontrovertible that the corporate income tax harms wages disproportionately. There is no academic or empirical argument otherwise. At the moment, your argument below seems to only contain your assertions and bias as opposed to reason and factual data subject to peer review.

There was a measure of confidence that I gained before putting my name on the op-ed I wrote for all to see. This confidence was founded in the form of personal conversations with US Federal Reserve Presidents (both active and retired), Nobel Laureate economists, Government officials in Canada, Switzerland, and Ireland (where this was successfully enacted) and a few other assorted economists that advise US Presidents and State Governments. Not to mention my personal experience in the global capital markets.

The inaccuracy of the premises you present in your email below are too numerous to address in my short response here. For that I apologize. Best of luck with your research. Mine has been vetted by some of the best economic minds on the planet.
Bob Marcellus

My only comment to the aurguments is where is the lost revenue coming from if $650m plus is no longer coming into the state, especially while we are looking for $4B? As I teach my students in the areas of Critical Thinking, we sometimes come up with what appear to be valid solutions, but fail to examine closely the long term impacts; i.e. Ethanol. I continue to see short term solutions being proposed that will only leave my children and grandchildren with the long term effects. Finally, since Va will not be the first in implementing this concept, what has been analyzed and assessed in the other states that have such programs. Did they see corporations coming into the states at rates that would justify implementing such a program in Va?
One need only look to Ireland which reduced its corporate income taxes, prompting complaints from the European Union, particularly the French, that this gave them an unfair competitive advantage. The Republic of Ireland experienced unprecedented economic growth from the mid-1990s until 2009.

Let’s give Virginia an unfair competitive advantage!

If you’re concerned that we’ll lose $650M (which seems highly unlikely if the state economy takes off), then tax the churches. There’s no justification for giving them a tax break. They are in the sales business. Their product may be intangible, but it’s a business nonetheless. There is no justification for churches to enjoy tax-free status.

One need only look to Ireland which reduced its corporate income taxes, prompting complaints from the European Union, particularly the French, that this gave them an unfair competitive advantage. The Republic of Ireland experienced unprecedented economic growth from the mid-1990s until 2009.

Let’s give Virginia an unfair competitive advantage!

If you’re concerned that we’ll lose $650M (which seems highly unlikely if the state economy takes off), then tax the churches. There’s no justification for giving them a tax break. They are in the sales business. Their product may be intangible, but it’s a business nonetheless. There is no justification for churches to enjoy tax-free status.

I don’t think that taxing the churches is the answer even though there are some very wealthy churches even in our locality. Churches play a huge role in providing monetary support for missions projects locally and worldwide. So what happens when you lose those dollars to taxes? Who will fill that void?

Let those contributions be tax deductible, just as they are for corporations and individuals.

I’d actually like to see the numbers regarding that “huge role in providing monetary support.” Churches don’t have to open their books, so I’m not sure we really know what they do with all the money they collect. When you look at the size and magnificence of church construction, it’s clear that their funds aren’t all going to help the poor. Ministers of even poor churches usually drive very nice cars. Church support of the poor is almost always tied to a requirement that the recipient listen to proselytizing and preaching, i.e. blackmailing the most desperate.

Rather than giving charity, it’s better to give business loans – particularly to women, as the liberation of women is the single most critical component for pulling a country out of the dark ages, as it is women who raise the next generation. All we do with charity is keep people dependent and breeding children they can’t afford. Government charity of course breeds corruption. In 3rd world countries, the best solution is to provide small business loans to women.

With regard to Christianity, in the New Testament Jesus provides 8 specific steps (some of which contradict each other) to get into heaven. However he repeats one step twice – SELL EVERYTHING and give it to the poor. Since churches won’t sell everything and give it to the poor, tax them.

Yes, I know this is getting off topic. (And it’s really easy to hit DELETE).

Well, that’s what great about this country is that everyone is entitled to their own opinion.

I wholeheartedly disagree with your statement “All we do with charity is keep people dependent and breeding children they can’t afford.” I have witnessed firsthand how helping folks in need gave them the break they needed to succeed in life. There are always a few bad apples in every bunch, that mooch off the system but all in all, churches play a very important role in society and taxing churches is not the answer.

This isn’t about a few bad apples.

Yes, you can help INDIVIDUALS with charity, but you help SOCIETIES by empowering women with a small business – and that means business loans. I work with clients in 3rd world countries around the world, and things are not getting better. Running a mission may make YOU feel better, but it does nothing to solve the systemic problems that confront third world countries. This is like the so called war on drugs. How long do you pour money down a rat hole before you realize that your efforts are counterproductive, despite your good intentions?

Did you read the Richmond Times Dispatch Insight edition this past Saturday? There is a population explosion in Africa, due in large part because Bush refused to let funds for his AIDs initiative be used for contraception and education about family planning. Like the Catholic Church and other abstinence-only organizations, all we’ve done is manage to create an environment for more poverty, sickness and death – and in time, the certainty of war over scarce resources.

The revenue is not lost by any means, not even in the relatively short term of12-24 months. Both the actual results of eliminating this particular tax and also the economic modeling note increased flows in investments, increases in payroll, income and sales taxes etc as a result. Note, the lag between announcing this policy and actual implementation is an important factor. By making this effective 12-24 months in the future creates a climate where “revenues” do not dip nor experience the total “loss” that is of your concern. The j curve effect is typically in between the fiscal budget cycle and is effectively masked. This allays fears of those defending existing spending levels. I do not wish to enter that debate but suffice it to say that this is net revenue positive in addition to the employment and growth benefits. The benefits do not just extend to the migration factor of new business coming into the state. Our existing wage base is currently depressed by about 5% due to the existence of this tax. The body of research does not find similar effect with reductions of any other tax like the sales tax and income tax unless they are truly punitive. The reason this jumps out is that it is a tax on capital and not on the end production of the economy. I was surprised at the body of work on this subject.
If you would like more detail other than the two attachments I will be glad to send you the talking points. See attached 3 page brief and report.

Dear Mr. Ellerson

The argument is far from specious as you assert. You may wish to research the issue more before making that assertion in public. You are welcome to see a copy of the report we gave the Governor which contains clear and convincing academic support from nobel laureates to actual data from countries and provinces that achieved material gains in jobs and GDP growth. It is incontrovertible that the corporate income tax harms wages disproportionately. There is no academic or empirical argument otherwise. At the moment, your argument below seems to only contain your assertions and bias as opposed to reason and factual data subject to peer review.

There was a measure of confidence that I gained before putting my name on the op-ed I wrote for all to see. This confidence was founded in the form of personal conversations with US Federal Reserve Presidents (both active and retired), Nobel Laureate economists, Government officials in Canada, Switzerland, and Ireland (where this was successfully enacted) and a few other assorted economists that advise US Presidents and State Governments. Not to mention my personal experience in the global capital markets.

The inaccuracy of the premises you present in your email below are too numerous to address in my short response here. For that I apologize. Best of luck with your research. Mine has been vetted by some of the best economic minds on the planet.

The executive brief and research reports summarizing the data referenced in my op-ed is available upon request. Just email me anytime
Regards
Bob Marcellus


The utter speciousness of your argument is that nowhere do even acknowledge, much less propose replacement of the lost tax REVENUES that will surely result from the proposed elimination of the corporate income tax. To imply, as you say "everyone knows," that prosperity will magically "trickle down" from corporate tax cuts generating newfound corporate spending on goods and wages is ludicrous in the extreme. Trickle-down economics has been thoroughly discredited over the years, and that is all you are proposing--more of the same-ol'/same-ol'. You might try suggesting something novel besides cutting taxes on top earners for broad-based economic recovery. The unspoken intent to put Va. government on an extreme "diet" by radically cutting tax revenues won't work. It ain't gonna happen. Ever. That sort of suggestion is rather tiresome. You don't even suggest where state government services should be cut, to reduce the need for those lost tax revenues.

You raise the specter of double taxation of shareholders, intending to whip up indignation over perceived unfairness, without providing the economic history of such a policy. Corporations are purely creatures of the legislatures and did not exist prior to about 1500 CE. As the doctrines of limited investor liability evolved for corporations (contrasted with unlimited investor liability of partnerships), the historical quid pro quo for allowing such limited liability was the notion that the corporation, deemed a stand-alone investor-sheltering entity, should pay its own taxes. There is nothing inherently natural or predictable about the limited-liability form of investment. The only "double-taxation" in the corporate form is derived from the dividends paid out to investors being neither deductible from non-pass-through corporate gross income nor excludable by investors when received, thus being a second taxable event. BUT, there is no double tax on earnings retained by such corporations nor on earnings paid out to workers, nor on earnings used to purchase inventories and raw materials, and so forth. The latter are all deductible corporate expenses. One could, therefore, argue with as much credibility as your arguments that a tax policy that encouraged corporations to retain earnings and grow in value might well enrich investors more in the long run than dissipating earnings as dividends. But, I am not making that argument. The corporate income tax may be a pass-through cost of doing business (as I suspect), but I reject the notion that it is somehow "unfair" in the historical context.

I will repeat my primary assertion: that the only way to restore our economy, whether measured in Gross Domestic Product or otherwise, is to put spendable "spare change" back into the pockets of the workers and middle class, which was once the bedrock of American prosperity since World War II , but has itself been dissipated in more recent times. It was consumer spending by the workers and middle class that once kept the US economy running, and most workers are, by far, employed by businesses that are NOT publicly traded.

H. Watkins Ellerson

But aren’t you missing the point?

Reducing or eliminating the corporate income tax means Virginia will be more competitive in bringing new corporations to Virginia. More corporations means more jobs. More jobs means more individual income and sales taxes and a higher standard of living for the state’s citizens. This is what happened in Ireland.

Am I missing something?

Unfortunately a private discussion between two individuals with dissenting opinions is of little value to the community at large. Hopefully Sandie will in fact post the discussion on her blog, but the blog site seldom generates any discussion even though the issues she posts there are interesting and critical to the community.

Personally I prefer the email forum, and people who aren’t interested can take a half second to hit DELETE. Goochlanders are by and large apathetic, but I’ll bet that many of the people on her mail list read the emails. Nobody has complained to me about copying the entire list (which as I indicated in an earlier email, I will always do if I am open copied on a broadcast email).