Redstate

I'm not an MBA (I learned all that stuff from my father before I was 10 :-) ) but there is something about MBA methods that methinks that the "public policy" folks (wonks) could really learn from to great effect.

The MBA method is the case study. Rathering than just argue "philosophy," let's set up the cases very clearly - what was done, what happened, etc. Then just hang them up on the wall. Try Estonia (see Steve Moore's piece at opinionjournal.com today). And Romania. And Ukraine.

Just hang those all up on the wall and let the lefties try to explain why none of that matters or applies to the U.S. Or why they wonder about the strong interest in "outsourcing" when that's what "the competition" is offering.

Our lefty friends like to wax eloquent about "competition" when it comes to driving down the price of airline tickets or heating fuel. But they don't want to face public policy competition - in other words, they want competition in EVERYONE ELSE'S oeuvre but NOT IN THEIR OWN.

Competition breeds efficiency and innovation. We have that internally between the various states. Let's have it internationally too!!

I spent the last twenty and change years at or near the policy level in government and had more than my fair share of dealing with MBAs. I would place them second only to government lawyers in being unpleasant and unproductive to deal with. Just as with law schools, the only thing the biz schools seem to teach really well is haughty condescention. But to the main point:

The problem with using analytical models from the Biz schools and private sector in the public sector is that no one can agree on what constitutes success in the public sector. In the private sector, success is a profitable, usually growing, business. In the public sector, if something can be done for a profit, the government probably shouldn't be doing it. If a government program is growing, it is likely failing but has popular support. In the private sector, customer loyalty and satifaction are good measures of programmatic success. Since so much of government is ministerial acts or legal and regulatory enforcement, "customer" satisfaction is usually counterindicative of mission performance - "Yes, I was very satisfied with the way the officer tightly cuffed my hands behind my back and pushed my head down as he put me in the car!" Likewise, I can't get a wastewater permit from either UPS or DHL, I have to get it from the DEC, so the use of the word "customer" is meaningless in most of government; I did my best to prohibit its use in my presence when I was still in government. I'll guarantee you that someone who didn't get his permit is not a satified and loyal customer.

This is a major vacuum in serious thinking in this Country. You basically have a choice between private sector models that various, usually Republican, administrations try to force on the public sector, usually without success or academic models that are totally agenda driven, usually socialist agenda driven, and which are advocated without regard for cost or effective use of resources. The academic models are perceived by the public, or at least much of it, because they are popular with the constituencies they serve. We conservatives may rail about how costly and destructive welfare programs are, but the people who receive them like the benefits, and the vast middle, who pay very little in taxes, doesn't really care. The business based models even when effective don't have any constituents, and often many enemies inside the government, so either nobody cares or nobody knows they're effective because of the propaganda spewed by the disaffected 'crats.

I am a firm believer in benchmarks and performance measures in government, but even there, it is very difficult to determine what to measure and how to measure it. I assure you that if you let a 'crat set his measures, he'll meet them with flying colors, but just as bad is the unrealistic measure set by someone else. For example, there was a perception in the Legislature that the unions always won grievance arbitrations. First, that isn't true, but since governments are usually bound by confidentiality statutes, you only hear about it when a fired employee gets his job back. The Leg dictated that one of my measures would be winning percentage in grievance arbitration. Hey, if I know that and have some control over what cases I take, and most people in my position do, I just don't go to arbitration if I think I might lose; I settle the case. That way, I always meet my measure. An effective measure would be arbitration award and litigation cost versus liability and settlement cost, and even that one isn't perfect because sometimes you have a good reason to take on a potential loser.

So, in sum, and before this becomes a book, I agree with you that there ought to be objective processes by which public policy decisions and public programs are evaluated. But until we can authoritatively say what success looks like, we won't know how to measure it.

In Vino Veritas

And this problem applies to the non-profit world as well and has become acute as it has become popular to hire MBA and apply business models - but try measuring 'profit' of a non-profit dedicated to say curing breast cancer.

There are some programs out there that are working on the challenge, joint public policy-MBA schools and busienss consultants recognize the issue and are coming up with ingenius, if not flawed, attempts at measures. But for all the work I've seen, and the money I've made trying to adapt business solutions to non-profit and public sector entities, I still think it is at best a subjective and arguable result.

The only way I think you can go really wrong is if you put full faith behind a model as 'the' answer.

But even so, it's not the point. My point is that we need to take the gloves off American businesses.

The Democrats believe taxes should be higher on productivity. That's because their whole objective is to produce equality, not prosperity.

But that whole project has now gone so far that it's going to cause real pain and real disadvantages for us and our children.

That's why the whole mindset needs to change. Businesses are the ones at an unfair disadvantage, not middle-class or low-income individuals.

Although it's not my point and I could hardly care less, you may want to be doctrinaire about replacing the government revenue from foregone business and capgains taxes.

If so, then raise income tax rates on the middle and lower classes. Not only is there a huge amount of untaxed value there, it's also not economically productive and should be taxed more.

that the Republican party should run on a platform of setting the corporate and capital gains tax rates to zero and offsetting this revenue loss by increasing income taxes on the lower and middle classes because these classes of people are 'not economically productive and should be taxed more'?

Businesses are the ones at an unfair disadvantage, not middle-class or low-income individuals.

What about middle-class or low-income individuals who own businesses? What about middle-class or low-income individuals who work for businesses?

I appreciate your position but you seem to be disconnecting American citizens from American businesses far too much. When you talk about businesses as being disadvantaged that's just a proxy for talking about American citizens, across the board.

... you may want to be doctrinaire about replacing the government revenue from foregone business and capgains taxes. If so, then raise income tax rates on the middle and lower classes

Why is your first suggestion for offsetting a hypothetical revenue loss, to raise taxes, instead of lower spending???

At any rate, people worried about selling this ought to look at results from countries lowering corporate taxes for their ammunitition. Canada is a "local" example of a country lowering their federal corporate tax rate (from 28% to 19%, and perhaps even lower) and here is their rationale:

“If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment. As for foreign investment, we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border. Finally, it would strengthen Canadian companies against foreign takeover,”

More on Canada's move toward lower corporate tax rates.

People can argue about 20% versus 10% versus 0%, but I have to hope that Republicans can at least make an effective argument for lowering it, period.

I did some research after blackhedd's post yesterday on the dollar, and in 2006 the govt collected $354 billion in corporate income taxes - http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf - I don't have the figures for capital gains taxes.

Interestingly, the cost of compliance for businesses was $148 billion in 2005 - http://www.taxfoundation.org/files/sr138.pdf

Try reading it aloud as if you were giving a stump speech.

We always try to balance fairness against prosperity.

But there comes a time when we can't afford to be fair, if our prosperity suffers too much and our children can't get good enough jobs to pay off their debts.

That time has now come.

As a low level manager at a Fortune 500 company, I definatly see this happening and I've been concerned for quite awhile now. A lot of the services we provide are going to foreign countries and Americans are getting laid off. It impacts the state level also, our company started in California and over the last 6 years we have been closing down sites and laying off employees in California siting the cost of doing business here, and opening up new sites in Arizona, Nevada, and Texas.

Looking for alternate, equivolent jobs in my area has proven difficult.

Taking from the Rich and giving to the poor (and by poor, I hear me) sounds good at face value, but when you consider that the rich will take their business elseware or fail because they are unable to compete with others who do, I find myself without a job and hense worse off than before. As you said, "Money may not buy happiness, but poverty buys nothing".

We sell this as better jobs and job opportunities. Even if you already have a job, it provides more options for lateral and upward movements as the demand for American workers increases.

See, this really isn't so hard.

would you support?

See, you're trying to solve the wrong problem. We shouldn't be debating about how to fund the government. The government is doing pretty d*mn well as things stand.

We should be debating how to make businesses stronger.

In politics, sometimes you have to oversimplify things to get people's attention.

We've gone too far in emphasizing fairness over prosperity, and our children will live poorer lives as a result. Restore the balance!

That's the slogan.

"We shouldn't be debating about how to fund the government...We should be debating how to make businesses (and the US economy) stronger" -blackhedd

late checking RS this morning, busy selling my "Cuomo puts" on MER, WM, C and the rest..
====
"Enlightened statesmen will not always be at the helm." -- James Madison

Assuming a corporate rate of 0, some portion of this would be recouped through personal income taxs, sales taxes, property taxes, and capital gains (If you follow me on this and not Blackhedd) and dividend income.

There is a limited number of things big mean corporations can do with their money:

1. Pass it out as loot to the CEO and his cronies as bonuses or higher pay (this is obviously the "Let's make John Edwards wet his pants" scenario). In this case, some portion of it is going to be directly taxed as income. The rest of the money would be invested or spent, both of which result in increased economic activity, be it building yachts or investing in new companies. Again, increased activity and hiring, more taxpayers. The only scenario under which this doesn't work is if you believe the "rich" will play Uncle Scrooge and store their wealth in a giant money bin so they can swim in it at night.

2. Pay it out as dividends. Dividends are taxable. Alternately, hang onto the cash or buy back stock and drive up the share price. In my world, capital gains are taxable (when realized).

3. Pay higher wages to workers, which is taxable income.

4. Invest in new production, technology, research, product development, etc. This will result in taxable activity (buying new tooling for a factory means more work for factory workers, more employees paying taxes, etc.)

I'm sure there are a few other things corporate America could do with a pile of cash that the government refrained from pilfering, but the 4 above are the main options. I'd guess (and it is only a semi-educated guess) that a pure, static analysis would find that between a quarter and a third of the tax revenue "lost" would be immediately recouped as the money gets pushed into other taxable actions.

A dynamic analysis, of course, would include the incredible explosion in economic growth and prosperity that would follow. Not too difficult to imagine this making up most or all of the rest of the "lost" revenue within a few years, and then surpassing what would have been collected if we'd maintained the corporate income tax.

And don't forget that some of the impact of eliminating corporate taxes would lead to reduced expenditures - lower unemployment payouts, less need for aid to college students, fewer pension plans needing bailouts, etc.

But of course, if we *want* to "pay" for the tax cut, I suspect Senator Coburn and a few others would have a few suggestions on where to start cutting spending...

Unless you have more than 100 shareholders you should already be an S-Corp. This effectively reduces your tax rate to 0 for earnings passed along to shareholders. You pay at your tax rate.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

As I just noticed someone replied, there is no reason you should be double taxed.

Either: change your status to an S corp, which you can elect to do with an IRS form.

Or: Pay yourself all profits from the company. If your C corp makes zero profits, nothing is being double taxed.

I'd suggest talking with an accountant. Or a new one if you have one.

It is doubtful that businesses would "hoard cash in order to drive up share price". To Wall St, hoarding cash is generally a bad sign for the prospects of that business, and having a large cash position on hand would signal to the market that the business didn't have investment opportunities within the company's line of business to spend that cash. Thus, the company's PE ratio would likely decline based upon this signal.

Generally speaking, it is capital expenditures that increase the share price. There are very few actions that businesses can take that cause a statisticly significant increase in the share price, and capital expenditures are the most significant and well-known.

Esp if the price to book drops low.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Since when is taxation on every time people make money, the state of nature?

HTML Help for Red Staters

I don't know about a "state of nature" but I can assure you that favoring some forms of income (capital gains) over other forms of income (wage, salary, rent) is just as economically ineficient as any other sort of policy that favors one form of production/wealth creation over another (think about the ineficiencies in our economy associated with policies that "protect" the sugar industry from "unfair competition.")

Not to mention that, politically speaking, trying to eliminate capital gains entirely is just short of suicidal.

HTML Help for Red Staters

Sure.

You have two income opportunities, one to be paid in wages (taxable) the other in capital gains (untaxable). Assume that in both cases, the income reflects the amount of wealth you create.

Your wage income opportunity is $100,000/yr, but after taxes it's $80,000. Your capital gains income opportunity is $90,000, tax free.

Question: Which income opportunity are you going to pursue? And how much wealth is going to be created as a result of this?

Policies favoring one type of economic activity over another are economically inefficient. There's really no difference in favoring capital gains income over wage income than there is in favoring investment in "green" wind energy over energy from coal. One of the basics of free-market economics is not to rig the market by favoring or disfavoring one activity over another. That applies to income as well. After all, capital gains taxes could just as easily be higher than wage income(and in fact, it has been in the past) if you prefer to favor wage income.

So in other words this is going to be a tiny, tiny, tiny distortion to the system with virtually no real world consequences, in exchange for being a great incentive for investment.

Consider the set of people who have those kinds of options, and you'll see why the tradeoff here is good.

HTML Help for Red Staters

Yes, similar to the tiny, tiny distortion that ag subsidies represent. Or tarrifs on steel. Or the minimum wage. Or wind energy tax credits. Or R&D tax credits for corporations. Or building bridges because the U.S. Senator who represents the area sits on the right committees. Or time-and-a-half for over 40 hours worked in week. Or...

I hope you catch where this is going.

You're ranting incoherently to me. How do any of those compare with something that makes a tiny inefficiency, in exchange for a large nationwide economic benefit?

HTML Help for Red Staters

Follow the Law of Holes: stop digging.

For you to "know" that such-and-such an intervention in the market creates only a tiny inefficiency, you have to know what the inefficiency is. That means you have to know and understand all the possible paths that the capital might otherwise have taken, and the effects — primary and secondary — of each of those flows. In short, you have to be smarter than a market at setting prices. Do not play this game with real money.

Drink Good Coffee. You can sleep when you're dead.

I know it's tiny because it's only going to happen to people who have the choice between standard income and capital gains, and the standard income is higher than the capital gains by the difference between the current income tax rates and the current capital gains rates.

Most people don't have the capital to make anywhere near the amount of money they can make in wages, from capital gains. So we're talking about a very narrow circumstance.

And besides, the fact is that we're already preferentially favoring capital gains over other income. And we seem to have done pretty well that way, haven't we?

So while granted, perfect knowledge of what's going on in our economy is impossible, empirically cutting capital gains rates and creating that incentive has served us well. I think it makes sense to continue on that way.

HTML Help for Red Staters

The fundamental flaw in your premise is that capital gains income is the only type of income available to those who make investments (which, it seems, is what you're after - increased investment).

Investments take many form. For example, a small business owner might chose to spend $25,000 on new equipment that will, she figures, increase her pre-tax PROFIT income from her business (which is going to be taxed just the same as wages/salary income) by $2,500/yr (a 10% return on investment, not bad). Let's assume that between FICA and her state and federal income taxes, her marginal tax rate is 40%. So, her after-tax income increase is $1,500.

Now, assume capital gains taxes are eliminated utterly, and she can buy securities that will provide her with a 7% return. The same business owner now has a choice - invest the $25,000 in her business, creating $2,500 in wealth(of which she gets to keep $1,500), or invest it in securities that will create $1,750 in wealth, of which she gets to keep $1,750.

Congratulations, you've just diverted $25,000 from a highly productive use to a less productive use. Now imagine this playing out across millions of small business owners, who now have less incentive to invest in their own business where they will create less wealth, and more incentive to invest in other people's business, where the money will create less wealth. Oh, and by the way, since it's mostly only larger companies that have securities to invest in, you're diverting scarce capital from small businesses to big business.

Oh, and by the way, you've also just driven up interest rates for all businesses. Why? Well, because business has two main sources of raising capital (outside of their own profits) - borrow it, or sell equity. Capital gains opportunities are mostly (but not exclusively) found on the equity, not the bond side, of capital markets. The after-tax return of capital gains has now increased significantly compared to interest income, if you eliminate capital gains taxes. So, if a company decides they want to borrow rather than sell equity (and again, this is more likely to be the case for small businesses compared to big business), they're going to have to pay a higher interest rate in order to attract money.

Are you familiar with the law of unintended consequences? There's a reason why free-market economists like myself tend to shudder at "pro-business" or "pro-investment" policies that advantage one form of economic activity over another.

Why would keep a one-shot $1750 instead of an annual $1500? Your example person isn't very rational.

HTML Help for Red Staters

Ah, no. Mutual funds are set up for recurring capital gains. So it isn't a "one shot" deal. Even if it was, it would make sense.

Year 1: Invest $25,000, earn 7%. End of year funds = $26,750 (orginal $25,000 + $1750 cap gain). So, what are you going to do with this $26,750? Invest the whole sum, or just the original $25,000 again. If you again invest the $25,000 and earn 7% again...

So, no, it is not a "one shot" capital gains opportunity.

If a small business enjoys even minor success you wind up with absurd situations where at the end of the year you have to find ways to burn cash as legitimate expenses. If you don't you have to either distribute it or pay taxes on it, either of which takes it out of the business.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Irregardless of the rationality of a business owner doing what you have suggested -- what do you think happens to that $25,000 invested in securities? Do you think there is a huge "securities mattress" out there where business stashes money? It simply disappears?

When the money -- whether invested by the business owner in her company or in securities-- stays with the business owner, rather than flowing into the black-hole of government, it is preferable to throwing it away in taxes!

he is making is that you are creating a preference for investing in someone elses business - which geenrates capital gains - over invsting in your own business - which generates profit/income.

It's a fair point, do we inherently think that small business owners are less efficient with investment than larger organizations and thus we should encourage people to drive investment towards those larger organizations?

That is EXACTLY my point. The proposal to eliminate capital gains taxes is premised on the idea that investments that produce capital gains (either for your own company or another) are superior to investments that produce other forms of income, such as small busines profits. Our economy would wind up with a surplus of cap-gain seeking investment and a shortage of profit-seeking investment.

As a capital gains opportunity, hasn't the $90,000 required to take advantage of that opportunity already been taxed once?

In the case of a sole proprietorship that becomes a corporation, the dual-taxation argument makes sense, because the owner literally has to pay two sets of taxes before he gets his money.

However in this kind of transaction, I think this concept of multiple taxation starts to fall apart, because you know what? Every dollar in our economy gets taxed multiple times, in that sense.

If I make some money, and use it to buy a car to get a new job, should I not have to pay taxes on the wages from that job, because I already paid taxes on the money I used to invest in the car so that I could take the new opportunity?

HTML Help for Red Staters

Correct. You aren't paying taxes on the money invested, you're paying taxes on the income produced from your investment. If I buy a house for $100,000 and sell it for $150,000, I don't pay capital gains taxes on the whole $150,000, only the $50,000 increase in the assets value.

Capital gains are "double taxed" to the extent that the asset is taxed during the holding period, i.e. the corporate income taxes paid by AT&T plus the capital gains I realize upon selling my AT&T stock is double taxation. If AT&T didn't have to pay income tax, but I had to pay taxes on the cap gain, then the income was only taxed once.

It's a political one. The reason to eliminate taxes on gains in capital assets is explicitly in order to privilege them, precisely because they will produce future growth and income. Anything you tax less, you get more of, and we want more capital.

Assuming that the growth opportunities exist in the first place. Which, on a risk-adjusted basis, they don't in the US. And we can fix that by eliminating taxation on business and investment.

We should be focusing on the best way to sell this to the electorate.

Well, I'm an economist (I'm many things actually, but "economics" is what it says on my degree), so I thought an economic perspective might be useful when discussing introducing economic distortions into the economy.

As for politics, my political advice would be the same: drop the idea of eliminating taxes on capital gains. Eliminating taxes on corporate income is tough enough and open to massive demogogery. Imagine the ads about "not taxing the rich at even the same level as the poor and middle class" if you try to eliminate cap gains taxes.

Besides, as noted, if you tax something we get less of it. Do we want less wage-earners in America? Do we want less salaried workers? We tax sales, do we want less sales? Corporations need to be able to sell bonds too, should we eliminate taxes on interest? How about dividends, I assume we don't want less dividends?

The truth is, we need to tax something to pay for government. I would rather, as many here I suspect, pay for a much smaller government. But we need to tax something to pay for government, and we can either pick and chose who pays taxes and under what circumstances, or we can just keep it simple and not favor one type of economic activity and income over another. Corporations are artificial entities, and it makes little sense to tax them. If we're going to have an income tax (and I'd be OK with not), then we should treat all income equally.

Last message for a while, I'm in the midst of a move. Hope I've offered something worth thinking about.

Corporate earnings are now taxed punitively, so businesses go out of their way to avoid being profitable. That's a distortion in itself, because it causes shareholders to reward growth rather than income.

If business taxes (at a combined 75% or more considering the effect double taxation) go to zero, and capgains go from the current 15% to zero, then by far the larger effect will be from the former and not the latter. The effect is economically healthy on balance.

A small quibble with your analysis of management behavior: the return on cash is now at cyclic lows, and rates are falling all across the yield curve. Businesses that hoard cash will be punished with lower share prices (and in fact will become takeover targets) rather than the other way around.

But again, I want to emphasize my point here. For a change, I'm not trying to do a fine-grained economic analysis. I'm trying to deal a blunt, sledgehammer-blow to the political discourse.

Our children's future is at risk if we don't stop all this progressive nonsense!

You know how I feel about the attention paid to growth, heh.

HTML Help for Red Staters

Your "quibble" is a fine one. I should have said that companies "may" hoard cash. In today's environment, that may nto be a wise move. But to your point on hoarding cash making them a buyout target, it's worth noting that buyout targets typically see their share price... rise.

The larger point I'm trying to make, and that I hope you will take, is that favoring one form of income over others is economically inefficient (and though I hate the way this sounds, pretty unfair). You will have people who's best, most efficient way to produce wealth/income is through wages or salary instead shifting their behavior towards less productive forms of wealth creation because the after-tax income is superior, even though they create less wealth.

Brief example: Assume that I could make $100,000/yr as wage income as a skilled carpenter working in housing construction. Alternately, I could earn $90,000/yr buying old houses, rehabbing them, and selling them. The difference? The $90,000 in income from rehabbing houses is tax-free, while I have to pay income tax on the $100,000 I earn as a carpenter. If my tax rate is over 10%, I'm going to go into the house rehabbing business, where I'll create less wealth for society but have more after-tax income.

Hope this explains where I'm coming from.

...and the corporation makes $90,000, it will pay the Feds 35% plus the state and local whack. That leaves maybe $45,000 to pay to you, the owner of the corporation, as a dividend. Whereupon you'll pay income taxes on the dividend, leaving you with maybe $22,500 if your other income puts you in a high bracket. Why do it in the first place?

And in the meantime, if you rehab a house, you'll still need to pay the carpenter his $100K because that's a necessary part of rehabbing the house, so by going into business you haven't eliminated the opportunity for a carpenter.

A business becomes a takeover target when its management runs out of good ideas for growing and putting capital to use. Hoarding cash is a sure sign of this. At that point, the value of the company becomes a function of the value of its existing cash flows, and of competition among potential acquirers (if any).

Obviously this analysis interacts with the systemic cost of capital and of the available growth opportunities, both of which are no longer restricted by national borders to any great extent.

"If you set up a C corporation to buy and rehab houses and the corporation makes $90,000, it will pay the Feds 35% plus the state and local whack. That leaves maybe $45,000 to pay to you, the owner of the corporation, as a dividend. Whereupon you'll pay income taxes on the dividend, leaving you with maybe $22,500 if your other income puts you in a high bracket. Why do it in the first place?"

Not a realistic example at all. The layers of taxes you describe are a worst possible case by someone trying to see how much they could pay in taxes. Either:
Pay yourself the 90k your corporation made (or whatever was left in profits). Business tax? Zero. You just pay personal taxes on the income.

Form an S corp (or change your C to S with a 1 page form), or LLC. All net profits after expenses flow to the owner as personal income. Business tax? Zero.

I was responding to his example.

He posits that, in the absence of a business income tax, a carpenter will forgo his ordinary income in preference to business income. He ignores that, whether C or S corp, the income to the business will have to flow out before the carpenter-turned-mogul can consume any of it, and therefore there is no opportunity for tax evasion.

A C corporation is allowed to retain earnings beyond a given tax year (an S corp is not). The reason any business would want to do this is because it has a use for the money. Either it can generate a return on it from organic growth that is greater than the risk-free rate, or (assuming it's small enough to afford the luxury of long-term planning) it can invest in R&D or other things that can produce future income.

A C corporation that does not have particularly good uses for retained earnings will either pay them out as dividends (a disastrous idea, given today's double taxation), or it will throw money at bad ideas (nearly as disastrous) or it will sit on cash (which will eventually induce someone else to buy out the company and fire the management). Or it will manage in such a way as to be less successful than it could otherwise be (this is the preferred course of very large businesses, or businesses in mature industries).

If we end the business income tax, then retained earnings become a substantially more privileged source of growth capital for business.

It's entirely true that this would leave the government in the position of needing to grow its own revenue, but remember my whole point here is about balance. We need more business growth, not less. The government has been doing fine, and it can stand a few lean years.

I understand your point. I would imagine that in practice that market efficiencies would render it largely moot though. Taking your case, wouldn't all carpenters chose to make the capital gains income, which would bid up the price of homes to the point that it was largely a wash between the two choices? I'm ignoring the point that the guy rehabbing houses should probably be compensated at a higher rate as he is taking more risk than a salaried employee.

3. Cutting corporate income taxes to 0 is going to be a REALLY tough sell. There are a significant number of people who hate
Walmart for providing cheap goods to the masses. These same people will irrationally claim that helping businesses grow (which provides jobs) will be "unfair to the little guy". I really don't have a good selling point for this. If they don't understand how cutting taxes increases growth and benefits everyone, I don't know how to convert them.

But really the roadblock for people who want to start their own businesses and never work at Wal-Mart again is the fact that their corporate income as a small business is going to get taxed twice. In that case they *might as well* work for Wal-Mart, in fact in terms of taxes they'd be better off!

If the idea is to get entrepreneurs over the survival threshhold, the most important thing to do is tax only the *personal income* and leave their small, fledgling businesses *alone* -- they're going to have enough trouble competing with the enormous buying power of the Wal-Marts of the world.

Focus this on small businesses....

Maybe we can sell it by easing into it. It's a LOT easier to sell a tax cut for Kowalski and Co. than it is for the EVIL Walmart or Exxon.

I hate to propose a progressive tax scale (because I think they are by definition unfair), but it might be an easier sell in the first go around. 0% tax on businesses with income under $1 million, 5% up to $10 million, etc. with a top rate that's still below our current top rates.

It'll give help for the small fledglings and give us a proof of concept as well. But most important, I could SELL it to the masses.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

Selling it to the people won't be the hardest part. Try selling it to the politicians and government at large. Now there is a challenge.

absentee

They'll go whichever way they think will get them elected. If you make the idea popular enough, the politicians will at least nominally support it.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

That's a good theory, but how many times have you seen something with popular support die in Congress? And you can assume from the get-go that you won't have overwhelming support for this no matter how well you sell it. The kossak types will never come on board, ever, no matter how well you document it. They're socialists and that's the end of it for them.

You have to sell the politicians on the idea itself, not just the popularity. Until I see them making real efforts to cut spending and eliminate pork, I'm not going to have high hopes they'll be on board here.

absentee

I'm not sure that it will make sense to the masses - but it is impossible for a business to pay taxes, as a business is just an entity that passes all its expenses along to people in the end. Thus, only PEOPLE can pay taxes. A business has 3 ways that it can pass the expense of taxes on - increasing the cost to the end consumer of a product or service, decreasing the pay of its employees, or passing along a lower profit to its shareholders. In practice, it's most likely that the two former options will be chosen, which screw the little guy the most - although all three screw the little guy directly, provided he is a member of the investor class.

Numbers 1 & 2 in your list is an easy sell, in my opinion. To number 1, I would add that it will also encourage foreign companies to locate in the US, increasing the amount of jobs available and resulting in more competition for quality workers, raising wages. To number 2, I would add the rhetorical question(which is applicable to just about any tax cut), "would you rather see your pocketbook and the company you work for grow, or would you rather see government grow?"

Number 3 - a bit tougher, as it requires people to realize that businesses DO NOT pay taxes... Perhaps an angle could be - "politicians know that businesses don't pay taxes, and to raise the tax revenue, instead of taxing you directly and costing them votes, they sneakily decided to tax business, which really is a tax on you." The key is getting people to realize that their standard of living will go up through a combination of higher wages, lower prices, and better returns on their investments.

There are all kinds of benefits for the corporate rate to be zero, and anyone can rattle off a list of at least a few. Once people realize that businesses, in fact, cannot pay taxes, what's the reasoning for not cutting them to zero - "I like the government using sneaky taxes and want to screw myself so long as it hurts Walmart(even though it really doesn't)"?

HTML Help for Red Staters

Small business often turns into big business.

More importantly, "American" business is owned by and employs American citizens. Are American citizens in the nexus of "small business" somehow more worthy of reduced tax burdens and increased competitiveness than the citizens in the nexus of "big business"?

But...

How about we cut spending to make up any differences in tax revenues?

Yes, yes, a thousand times, yes.

99% of independent enterprises have fewer than 500 workers - http://usinfo.state.gov/products/pubs/oecon/chap4.htm

I doubt any business wants to shift workers overseas, as it would be much easier to manage the workers directly rather than 1000s of miles away. However, outsourcing has to happen and helps US citizens - we are in a global economy, and business is forced to compete with numerous competitors around the globe. We can either embrace the lower costs for goods and services that outsourcing results in, or we can try and setup some huge bureaucracy to insulate us from the real world. Try and figure out a scenario on how you're going to keep Johnny Wagonwheelmaker from losing his job in the US if there's a global market in wagon wheels. Would it entail tariffs? Tax breaks or loopholes for wagon wheel firms?

Big business becomes insulated from competition because of business taxes, and you may be surprised how many big businesses give to Democrats. Big business has the people to exploit the tax code, but the small business is unlikely to, and this keeps small business down. As a small business owner myself, I can attest to the fact that a majority of my firm's expenses are spent on accountants and lawyers trying to comply with the rules and regulations of both the marketplace and the tax code, and these costs dwarf the product development expenses(which should be our largest expense, given that it is a software firm).

The freebie accrues to the American people, not the business, the business is just an entity.

If we can get you behind eliminating corporate taxes, there's hope for the country after all....

But the direct answer to your question is:
This isn't about maximizing government revenues. It's aboujt growing our economy and encouraging a return of US based manufacturing.

I suspect that most of the "lost" revenue from corporate taxes would be made up by increases in overall income tax receipts due to a boom in overall employment income. But I really don't care if the government makes a dime in return or not. Eliminating business income tax would be a boon for our country, a boon for employment, a boon for manufacturing, a boon for.... well everyone. If it resulted in $350 billion less revenue for the federal government it's worth every penny. Far more return on investment than any government run program we could spend the money on instead.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

I am not a dogmatic Liberal. Just because some established "Liberal" claims some policy is a Liberal policy doesn't mean I have to. And, IMO, open and efficient markets are a liberal position.

Having said I can't say I care much for you reasoning because it can be used regarding ANY tax. The government still has to pay their bills. So either we choose to increase other taxes, and I don't believe that Blackhedd's suggestion of raising bottom half earners taxes will even come close to offsetting the tax revenue loss.

Of course we could just put it on the tab. But it seems to me that Federal deficit spending is contributing to our current woes. And considering that in 10 years time the government will no longer be able to hide deficit spending behind FICA surpluses, I think it would be imprudent to look for ways to cut more revenues.

This has always been my problem with the Conservative on taxes. You guys think that all taxes should be cut. One week it's income taxes, the next week it's corporate taxes, the next week it's estate taxes. The problem is that we still need to pay for stuff and until both sides can come up with real spending cuts, and I don't see that happening anytime soon, tax cuts are a double edged sword.

So as I said, I'm all for a corporate tax rate cut. But I want to hear how that revenue loss will be mitigated.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

To a certain degree, the tax revenues that may be lost will mitigate itself through taxes on the resultant higher wages, more economic activity, less need for welfare programs due to higher employment, etc.

However, to the extent that tax revenues MAY be lost, how about just cutting spending? Revenues aren't the problem, wateful spending is.

If you have a plan for cutting spending that has a shot in heck of passing Congress I'm all ears.

But I don't see any Congresscritters who are seriously suggesting spending cuts*.

We can't keep wishing that Federal spending will get in check on its own. It requires people to experience some pain. It requires people to accept cuts in services they may feel important. I see political will for that.

* - Ron Paul is not a serious person.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

Congress has a way of spending all the tax money raised and then some. The more you give them the more ways they find to spend it and then some.

Maybe shutting off the tap will slow them down a bit. You can't stop a drunk from drinking, but you can slow him down if you close the bar a little early.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

has never worked. It just raises the Federal debt because the Congresscritters are more than willing to engage in borrow and spend. Heck it's politically easier to do that than tax and spend.

The only way that will eventually work is we start to impact our credit worthiness. But that is a high price to pay to make a point.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy