Stan’s Plan: Show Me the Money!

August 29th, 2014 at 1:51 pm

Stan Collender is one of my favorite budget wonks, and I don’t say that lightly. His work has a long history of clarity and common sense and I believe we share the same concerns that the direction of fiscal policy in recent years threatens to leave our government without the resources it needs to meet the challenges we face.

So it was with nervous curiosity that I read this post of his advocating the abolition of the corporate tax, as this is something I’ve been worrying about a lot lately. What with the recent inversion dust-up, this idea to kill the corporate tax and replace it with something better is getting more play. Problem is, as with Stan’s plan, that “something better” tends not to withstand scrutiny.

Stan’s idea, though very clever in one respect (note how he pits the spending-side lobbyists against the tax-side lobbyists), faces the classic “show me the money” problem: he argues that we can pay for revenue we lose from scrapping the corporate tax by cutting all the spending in the budget that supports corporations. Giveth to corporations with one hand, by ending the tax on their income. But taketh away with the other, by cutting all the spending in the budget that flows their way.

The problem is that the hand that gives holds way more money than the one that takes. The magnitude of the revenue loss couldn’t possibly be made up with the spending cuts because there just isn’t enough spending there to make up the more than $300 billion or so that you’d lose on an annual basis from ending the corporate tax.

Don’t get me wrong: no question that we waste a lot of money subsidizing businesses that don’t need the help. Agriculture subsidies are a good example. As Elsa would say sing, “let ‘em go!” But they amount to maybe $4 billion a year. How about getting rid of the Export-Import bank, as many on both sides of the aisle are calling for (though I’m not quite there)? That actually goes the wrong way: the bank contributes about $1 billion to the budget each year. The Small Business Administration? Um…under a billion. The US Trade Rep? About $50 million…with an “m.”

To be fair to Stan, he might reasonably argue that if you add up all those cats and dogs, or “rats and mice” as my Kiwi friend more aptly puts it, you’ve got some real money. To be fair to me, the man with the plan (named Stan) should do that. The stakes are high here and I wouldn’t go around arguing we could offset the loss of over $300 billion a year without being sure I could make it up elsewhere.

In lieu of that, we have the Cato Institute’s 2012 estimate of “corporate welfare” in the budget. They get to $100 billion a year, which is a fair bit of rodents, though still just a third of the needed take. But Cato has some questionable entries in the ledger. Some of what they call corporate welfare goes to individuals, not businesses. They list the FHA guaranteed loan program as a $16 billion cost, when, like the Ex-Im bank, this program actually contributes to the budget. Then there’s R&D, including support for research at NIH. I can see where Cato wants to lose all of that, but I don’t and I’m not sure Stan does either.

Suffice it to say that Cato’s $100 billion is an upper bound, and it’s still way short.

One way to fix Stan’s plan is to reverse his sequencing. Don’t get rid of the corporate rate and then try to scrape together the payfors, but make all the cuts you can and then adjust the rate downwards accordingly.

But I wouldn’t go there either. Let’s say we could cut a lot of this waste—and Stan is absolutely solid in that aspiration. Why spend it on cutting the corporate tax rate? Yes, that part of the code needs serious work, but the corps themselves are doing better than ever, with historically high profitability. From where I sit, the folks who could use help in this economy are precisely not the ones who own shares in corporations. It’s the ones on the other end of the income scale, those who depend on their paychecks; those who would benefit from a stronger safety net or more investment in their upward mobility. Heck, if nothing else I’d at least use these savings to replace some of the mindless sequestration cuts (I’ll bet Stan would like that too!).

If I could cut a bunch of corporate waste, that’s where I’d spend the money. Not on a corporate tax cut!

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11 comments in reply to "Stan’s Plan: Show Me the Money!"

  1. Dausuul says:

    This is basically just a variation on that old Republican song: “Lower the rates, broaden the base.” And it’s a bad idea for the same reason. Corporate welfare, like tax loopholes, springs eternal. Politicians are always slipping in little giveaways to campaign donors and major employers in their states. Trim them back, and they’ll return. Raising tax rates, on the other hand, is an enormous political challenge.

    That isn’t to say we shouldn’t eliminate loopholes and cut corporate welfare! Quite the contrary, we should do that on a regular basis; budget housecleaning. But if we couple every housecleaning with a rate cut to make things revenue-neutral, our tax revenue will ratchet steadily downward. Which is, of course, what Republicans want, but liberals shouldn’t be so eager to play along.

    If you want an offset for a rate cut, do it with a rate hike someplace else. If you eliminate corporate taxes, then raise individual taxes to make up for it. Budget housecleaning should stand on its own merits.

  2. smith says:

    If you don’t tax the corporation, but you tax people, then you are giving corporations an enormous advantage over people, right? The corporation already has limited liability, pooled investment resources, shared risk, perpetual life, privileged access to credit markets, which furthers opportunity for greater growth and market domination.
    John Q. Entrepreneur makes $250,000 and gets taxed at a personal rate of 33%.
    Acme corporation makes $250,000,000 and gets taxed at corporate rate of 0%.
    Who wins in that competition?

    Everyone with any business background knows the tradeoffs when deciding to incorporate. If you’re going to reinvest much of the earnings back into the corporation, then the advantages are worth the extra tax you wouldn’t pay with a flow through. Isn’t it bad enough that corporate management already treats the company like a resource mine from which to extract wealth through excessive compensation, especially stock options. Do we really want to further encourage the irresponsible behavior of corporations by making them more powerful, profitable, and leaving them more cash to influence elections? Does anyone in their right minds think corporations are currently too weak? That corporate management needs to have more power over our lives?

    The notion of even lowering rates should be a non-starter, DOA, as in yeah right, in your dreams, let alone complete elimination, along with the elimination of the Estate Tax. Part of the problem stems from Obama’s misguided support of lowering rates. Part of the problem is the lack of counter punching from liberals.

    In the past, the argument was about owners being taxed from capital gains and dividend income and the so called double taxation. That argument is not being pressed now because of the focus on inequality. Strategically, this is a brilliant move. Since the already too wealthy can’t politically lower taxes further for the rich directly, focus attack on the corporate tax which as Saez and Piketty pointed out numerous times, is a tax on the rich. At the same time this move would head off efforts to end inversions with common sense laws that would prevent such machinations.

    • Smith says:

      I’m not sure the crux of my argument is clear enough, is coming through (too obvious, forest for trees, emperors new clothes). Corporations have huge advantages over other types of business ownership and taxable entities and most of the time, huge enterprises are corporations, whether public or private. There are many obvious reasons for that, as outlined above (pooled investment, shared risk, limited liability, etc). In that case it is the corporation that becomes all powerful, certainly a lot more powerful than the rich investors who hold stock, who own the corporation. Even major shareholders have trouble influencing the board of directors, who are often actually a captive of management. There are exceptions, like Bloomberg LP, which is a limited partnership. But currently, taxing corporate profits removes money and power from the corporation in a way that taxing individual investors does not. By removing a 35% tax, the corporation is 50% more valuable (able to distribute 100% of profits vs. 65% of profits, assuming constant price/earnings ratio), meaning it’s ability to raise additional capital to expand or buy up other firms (especially competitors, creating consolidation, economies of scale, unemployment, and monopolistic dominance) is likewise enhanced. It tilts the business environment further towards corporations by removing the penalty of the corporate tax that helps offset the advantage of corporate ownership.

      What I’m saying is, even if you were able to guarantee that eliminating the corporate tax would be revenue neutral and that the burden of offsetting taxation would fall strictly on the 1%, it would be a very bad idea. It would further enhance the power of corporations, the advantages they already use to dominate the economy, to further snuff out competition and innovation from mid and small size firms (both smaller corporations and non-corporate entities), to influence the political process, to accumulate capital with zero taxation without increasing or diluting ownership, to enhance the value of a rich person’s stock holdings. So revenue neutral or not, and paid for by the 1% or not, dropping corporate taxation is a really bad idea.

      (we won’t even begin to address other order of magnitude smaller benefits of taxation, like tax breaks to influence corporate behavior)

      My thinking is this should actually be the main reason for opposing lower corporate tax rates, because corporations are already too powerful.

  3. Russ Abbott says:

    I still like the old idea of dropping the corporate income tax and taxing stock holders for their pro rata share of a corporation’s profits. Some money would be lost to cases in which non-profits owned stock. But it would probably be made up in reduced tax avoidance.

  4. Robert Salzberg says:

    The $100 billion Cato figure for line item budget spending is dwarfed by the hidden spending embedded in the corporate tax code.

    The TPC estimates that corporate income taxes will be $333 billion for 2014. While the federal corporate income tax rate is 35%, the effective tax rate is 13%. If we include local, state, and foreign taxes, the effective corporate tax rate is around 17%. So hidden tax spending for corporations is approximately equal to their total tax burden.

    There are additional large amounts of hidden spending in the Too Big To Fail subsidies and the unpaid for externalities of carbon.

    Direct taxes like a VAT, carbon tax, and FTT tax could replace all the revenue from corporate income taxes and be much more efficient.

    • Jared Bernstein says:

      To be clear, Stan C is talking only about the spending side of the budget. He is excluding any breaks in the corp tax code itself.

    • Robert Salzberg says:

      I wrote:

      “So hidden tax spending for corporations is approximately equal to their total tax burden.”

      Whoops. SInce corporations pay only 13% of 35%, they need deductions worth 22% of profits, $564 billion, to reduce their taxable income down to 13%. So the hidden tax code spending for corporations is 169% of the $333 billion in annual corporate tax revenue.

      Link for GAO estimates of corporate taxation:

    • Alex says:

      The TBTF “implicit subsidy” is basically a contingent liability, i.e. the government is on the hook if a huge bank blows up, rather than cash, so you can’t just say “well, we’ll take it away from BAML and give it to nice things”. There’s not a pot of money marked “banks”.

      In theory, you could estimate the risk-adjusted annual value of the insurance-like service government extends to banks, and try to reckon how much more cheaply the government could borrow without it – but then the government can borrow so cheaply at the moment that this might be a disappointment, and in any case it would be a squashy number.

  5. Robert Buttons says:

    Cato is WAY underestimating corporate welfare. As I have posted previously, NGOs that advocate for more food stamps are all run and financed by corporate food companies.

  6. Larry Daniels-Murray says:

    Thank you for a thought provoking article. The $4 billion a year you mentioned for agricultural subsidies captured my attention. I’m wondering if that number includes the food stamp program that has traditionally been a significant part of the farm bill? If so I have reservations about letting that one go at this time.

    Farmers would like government out of their business. However, government wants an element of control. Hence, the carrot and stick program we call the farm bill.