The Case For A Zero Percent Corporate Tax-Rate

My Democrat friends are probably wincing just by reading the headline of this post. But bear with me as I lay out this case.

I started thinking about this concept two or three years ago. I think it filtered into my subconscious during the time when Trump was trying to lower rates and encourage companies to repatriate cash that was held overseas. My simple question was – why was that cash taxed in the first place? Why not deliver it to the shareholders who would get taxed on it any way? The incentive to keep cash overseas is just absurd.

Prior to that I believe I was starting to think about how countries compete and how the US was actually an “off-shore” haven for certain other countries.

Somewhere along the line, I came to the conclusion that the whole country would be better off with a tax rate of zero for corporations.

Here are just a few reasons:

1. Competition Between Countries

Countries compete on corporate tax rates. All else being equal, a country with a lower tax rate will have a competitive leg up on those with a higher tax rate. A United States with a zero corporate tax rate would have a MASSIVE advantage.

One of the most recent public disagreements on corporate tax rates between countries involved the EU and its member country Ireland. Ireland grants corporations ridiculously low tax rates and, as such, a lot of companies set up their EU subsidiaries there. Some corporations get an even lower tax rate by signing special agreements with Ireland.

The rest of the EU is pissed off at this arrangement because it means that tax dollars go to Ireland that they do not get. So pissed of that the EU equivalent of the US Supreme Court ruled that the special tax rate that Ireland offers to certain US tech companies is invalid and required that those companies pay multiple billions of dollars in taxes back to Ireland.

2. Competition Between States

In the US, there are a lot of tax breaks that are handed to corporations just for setting up shop in one state vs another.

These types of games would likely be severely reduced or just go away all together.

3. Wasted Labor

We have an army of legal and tax personnel whose sole job is to figure out the corporate tax code and do end-runs around it. That’s unproductive work. That brainpower and labor pool should be redeployed to something far more productive – and with a tax rate of zero for corporations that’s exactly what would happen!

4. Stock Buybacks

A lot of cash is used to buy back stock. This cash is not double-taxed. So, it’s a great way for corporations to return cash to shareholders.

For many, this is a good thing – the buybacks reduce the number of shares outstanding which makes the price rise.

Except that corporations tend to buy stock mostly on their highs. They stop buying to conserve cash during the bad times – when their stock is cheap.

Because of this, it’s a terrible way to deploy cash. They should be buying when stuff is cheap, not when it’s expensive.

Additional Reasons

Most corporations in the US already have a zero percent tax rate. This is because they’re formed as “s-corps” or “llc”s which passes through all profits to their individual shareholders and only then applies a tax rate. And, since the majority of businesses are small businesses with these kinds of structures most corps already pay a zero rate. So why distinguish between them at all? Why have some required to pay taxes and others not?

More importantly, for larger corporations there is now an incentive to NOT pay out profits to be taxed a second time. Instead, the profits are kept inside the corporation and, over time, the pressure to reinvest causes corporation decision makers to make poor decisions as to how to best redeploy those profits. After-all, they have to do something with it to prevent it from being taxed twice.

Giving corporations the flexibility to retain profits or pay them out would be a far more efficient use of capital. More dollars that would normally be mal-invested would flow to shareholders who can usually find better uses for them – that benefits the entire economy and the entire country.

Not to mention that the US would become an even greater economic powerhouse by attracting all kinds of foreign investments. Which will bring a TON of jobs with it.

***I need to expand on this idea at some point in the future. I feel like I can make a better case for it. But throwing it out there in an incomplete manner anyway***

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