It was a Google ad (I think) during the Jets/Bills game on the 13th. "Help support local business", it said. Nice sentiment, right?
Yeah, but it's the biggest scam going.
The message is that if we patronize local business, or small business, then small, local businesses will survive and do well.
The assumption is that it's on us -- that the playing field is level, and that if small, local businesses don't do well it's only because we don't go there very much.
In fact, the playing field is not level, and that is why we don't go there very much.
The business income tax is a tax only on profit, not on total
business revenue. This means the revenue that a business spends, in
general and as a rule, is not subject to income tax. Only the part that
remains of revenue after business spending is subtracted, is subject to
the income tax. That's why businesses get receipts when they spend. Only the net income, or pre-tax profit, is taxed.
Again, in general and as a rule, this means that the more a business can afford to spend, the more of a tax break the business gets. There is a reason for this, of course: It encourages businesses to spend, which is good for economic growth.1
But there's a catch. Big
business, which can afford to spend a lot, gets a big tax break. Small
business only gets a small tax break. And big business gets a big boost
from the tax code, while small business only gets a small boost.
The playing field is not level. It favors big business. Small business gets screwed.
1 Note:
Business spending is good for economic growth... or is probably good for economic growth. But far as I can tell, the idea that business spending is good for growth has been embraced religiously for a couple hundred years now. I'm not saying it's not true. But I am saying that people who know more than I do should drop the religious embrace, and evaluate the idea in the context of today's economy.
Two hundred years ago, business activity was too small to satisfy the wants and needs of society. At that point in time, expanding business activity was a very good idea.
But now, because the business tax encourages growth,
business activity has grown faster than society has grown, and it may be
just about the right size to satisfy the wants and needs of society. If so, maybe we no longer need a business income tax that helps business activity grow. At least, not one that favors bigness.
Or, maybe business activity is now too big, and we need a business income tax that hinders the growth of business activity? No, I hardly think so.
But
maybe, as I think, there is an imbalance: Business activity has
outgrown consumption activity. Business activity is too big to service
consumption activity because the latter is too small. The one has to fit the other. The tax code has created this imbalance.
The business income tax favors big business. Small business gets screwed, and consumers get screwed.
Whatever. Do what you want. Just remember, the business tax favors bigness, so there is nothing you can do to "support local business" -- nothing that will fix the problem that Google brings to our attention -- until we change the business income tax so that it no longer favors bigness. And while we're at it, so that it no longer favors business over consumers.
If this doesn't completely blow your mind, maybe you should read it again.
8 comments:
PS: The above is not about the Covid-19 economy. It is about the US economy.
Well, I forgot about Trump's tax reform.
"The Tax Cuts and Jobs Act (TCJA) reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent."
There used to be three different rates as I recall: low, mid-range, and high for small, mid-range, and big corporations. But I couldn't find anything on three tax rates under the TCJA. Then I found this:
Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% due to the passage of the Tax Cuts and Jobs Act of 2017.
"Flat rate" would mean everybody pays the same rate. That explains why I find only 21% and not three different rates.
That being the case, it throws a monkey wrench into the story I tell above.
If your corporate income tax is coming due, and you have a million dollars more profit than you need to satisfy your investors, you can take that million and invest it in new equipment. If you do, you don't pay income tax on that million dollars.
If your tax rate is 21%, the tax you owe is $210,000 less than it would have been: that is, 21% of a million dollars. This is the equivalent of getting a 21% discount on the new equipment you purchased.
If your tax rate is 35%, the tax you owe is $350,000 less than it would have been: 35% of a million dollars. This is the equivalent of getting a 35% discount on that new equipment.
In the time before the Tax Cuts and Jobs Act, a small corporation might have peen paying 21%, and a big one 35%. The tax advantage for the million-dollar purchase would have been $210,000 for the small business, and $350,000 for the big one. This is why I said the tax code favors bigness.
But with Trump's flat tax for business, everybody pays the 21% rate, and everybody would get the equivalent of a 21% discount on a million-dollar investment. So thanks to the TCJA, bigger business no longer gets a bigger discount on that million dollars.
Still, you know, before TCJA the small corporation paid a lower tax rate than the big corporation. Now, with TCJA, both pay the same tax rate. Some would say that still gives the big guy a bigger tax advantage than the little guy.
So it goes.
Maybe this?
https://taxfoundation.org/federal-corporate-income-tax-rates-income-years-1909-2012/
It needs some interpretation and inflation adjustment and stuff, but looking at that I guess I would say there was significant graduation from the end of the war, but those brackets weren't adjusted for inflation so the lower brackets were probably irrelevant after the great inflation, and they started getting intentionally flattened out in the 80s. So I think it's effectively been pretty flat for 30 or 40 years and your argument is basically valid.
Thanks Jerry. That could be a useful link! I see that the lowest corporate tax rate was 15%, from 1983 until the data ends in 2012.
In this PDF from rsmus.com they show that the lowest corporate rate for 2016 was still 15%. But as of 2018, under Trump's TCJA, there is a flat rate of 21%. So if I'm reading this right (I have my doubts) the tax rate went UP for corporations at the lower end of the "taxable income" scale.
That sounds entirely plausible to me.
I think the basic problem is that income is the wrong thing to tax. It should be a flat tax on value/net-worth. e.g. the military is protecting all of the US assets of those corporations, and they should pay for that protection at a rate proportionate to how much value is being protected. If you're not doing that, then I think you're introducing a distortion that favors bigness.
Hi Art,
i think you are on the right track in your discussion of taxing income versus taxing profits. We the people generally get taxed on income. Most of our expenses are not tax deductible.
My personal theory is that one of the main reasons China is doing so well economically is their corporate income tax. In the US the tax is on profits. In China, the way I understand it, the tax (25%) is on net income. That means a store can deduct the cost of goods purchased from sale receipts when of the goods but the cost of labor and utilities and all the other expenses are not deductible from taxable income.
IMO the main advantage that big business have is that they have larger net income. Walmart buys goods much cheaper than a Mom and Pop store can and thus has much larger net income. Most of that net income is not taxed in the US but would be in China.
China also has a bunch of ways businesses can reduce or eliminate the income tax. These tax breaks are designed to incentivize certain activities like income from growing food is mostly tax exempt. In China the cost of hiring disabled workers is deductible. That is an interesting one because if the disabled worker can produce as much as 3/4 the output of an able bodied worker there is an advantage.
I went to pick up bolts for work one time. At the bolt place they sent me to the back room to get em, and there was a blind guy there, counting bolts.
But I doubt there was a special deduction for the bolt company for hiring that guy, this being the US.
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I always just assumed "net income" was the same as "profit". Thanks for clearing that up for me.
I googled it. The first result said net income is the same as net profit. The second result said there's a difference between net income and net profit.
I'll have to do some more reading on this, but it's probably time I understand that stuff.
Well I don't know if net income was precisely the right term to use. I don't want to get bogged down in the semantics.
If you have a lemonade stand your net income might be the cost of lemonade sold minus the cost of lemons. If you own Walmart you might want to define it differently if your tax liability depends on how you define it.
I assume that China has some sort of rationale for not basing the tax on gross income but I have not seen that explained.
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