Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Needed Corporate Tax Reform Is to Eliminate It
The principal cause of the anemic growth of the U.S. economy in recent decades has been the chronic trade deficits with the rest of the world which have cost millions of U.S. manufacturing jobs and converted the U.S. from the world’s leading creditor to the world’s leading debtor. There are many causes of trade deficits. Tax reform, contrary to the claims made for it, will not balance our trade at all. The US international trade deficits averaged about 3 percent of Gross Domestic Product in recent decades. If trade had been in balance, the growth of the GDP would have been 5.3 percent on the average since 2001 instead of 1.6 percent.
The principal causes of international trade deficits are the relative costs of producing goods and services in different countries, the foreign exchange rates, and the existence of barriers to trade imposed by trading partners. Wilbur Ross, the Secretary of Commerce, in an opinion piece in the Wall Street Journal 8/1/2017 states that the U.S. imposes fewer barriers on imports than the European Union and China with which we have huge trade deficits. Other countries with which we are experiencing large chronic trade deficits are Japan, Korea, and Mexico. Together with China and the EU, these countries accounted for 88.9 percent of our trade deficit in 2016. An unintended consequence of all of our trade agreements to date is that they enabled American corporations to invest in countries that have low corporate income tax rates and to export their products to the U.S. duty-free, exacerbating the trade imbalances. We would not be concerned about this practice if U.S. trade were in balance.
There is a simple solution to the trade deficits. We can impose single-country-variable-tariffs which are authorized by the world trade agreements which permit member countries to impose tariffs designed to balance trade. The tariff would apply to all imports from the trade surplus county including those of the multi-nationals formerly producing their products in the U.S. So long as trade remains unbalanced, the single-country-variable tariff would produce substantial revenues. Would it start a trade war? Countries with trade surpluses cannot win a trade war with countries they have trade surpluses with. The trade deficit country has the advantage in a trade war. If trade diminishes with the trade surplus partner, it will increase with the other trading partners with whom we have no trade deficit.
The high rate of corporate income tax is considered by many conservatives to be a barrier to exports. The truth that an income tax does not change marginal costs of production which determines whether trade is possible between two countries
Differences in corporate tax rates are a huge incentive in decisions where to locate factories. The case for reducing or better eliminating the corporate income tax rests on this fact. We recommend the elimination of the corporate income tax and taxing corporate earnings as the personal income of shareholders. Economists are nearly unanimous in considering the corporate income tax to be inequitable in its effect on the distribution of income. Billionaire shareholders are taxed as the same rate as the pension funds of low income workers leaving the latter with less resources when they retire.
Another criticism of the corporate income tax is that many corporations are able to pass all or much of the burden of the tax to consumers in the form of higher prices. Highly competitive firms like retail businesses and farmers and exporters are for the most part unable to shift the burden onto consumers. Firms with monopoly power are more likely to do so.
This needed tax reform would tax corporate earnings as personal income, just as we do with partnership earnings. After all, shareholders are partners who enjoy no liability for the debts of the corporation, often cited as a reason for taxing corporations as separate entities. Today, partnerships (and even proprietorships) can register as limited liability companies under the laws of most states. Thus the reason for the existence of corporations as separate tax entities no longer exists. Further, eliminating the corporate income tax and taxing corporate earnings as personal income would result in no revenue loss whereas cutting the corporate income tax rate would cause a huge loss of revenue.
The current proposals also call for reform of the personal income tax which we have written about in a separate posting on this site and to eliminate the estate tax. The estate tax is important in reducing the huge inequality of wealth over generations. It is one thing to reward the inventors of products and innovators with huge wealth to which there should be no objection but it is quite another to perpetuate difference in wealth beyond the life of the productive individuals who earned it.
Economy - Long Term
Economy - Short Term
Last 100 Years
Real Estate Taxation
Journal of Economic Literature:
Atlantic Economic Journal: