What’s the Best Corporate Tax rate?

Below is my proposal on Corporate Taxation. My proposal takes a unique behavioral approach that does not favor either the left or right (meaning it’s apolitical). My proposal favors the US economy.

The Plan

1) The US does not need to collect taxes from corporations. So there is no need to raise taxes to collect revenue since the US is never revenue-constraint. So High taxes do not make sense and is a deterrent for investment.

2) Since most corporations pass on taxes to their customers anyway, we should have low rates. I do not advocate a 0% corporate tax rate because of reasons I will list below.

3) However since taxes are a powerful tool used by the government to shape behavior in investment,spending & saving, Taxes can be used to help spur job growth.

4) Supply-side economics won’t work here. Lowering the corporate tax rate without preconditions will not automatically lead to Capital expenditures (CapEx) [which will boost Aggregate Demand (AD) and have a domino effect on the economy].

5) This is why I advocate lowering the Corporate tax rate to ~15%, getting rid of ALL Looopholes, BUT leaving Tax-exemptions and write-offs in.

I hate loopholes. Why? Because that is tax EVASION (illegal, or should be illegal).

I like exemptions and write-offs. Why? Because it can help shape behavior.

Here’s an example.

Take Corporation X. They have a bunch of excess savings and would love to hire more people, upgrade their infrastructure/equipment, and spend some more money on Research and Development (R&D).

Give them a tax-cut and they will say “Thank you”, and put that money into their pocket and *Likely* not spend it. Why? Because AD remains weak. While boosting AD remains a bigger $MACRO issue, a small boost in the corporate sector could help the overall economy.

 

 

 

 

 

 

 

 

 

 

 

 

Here you can see a clear decent correlation between the ECS & UE

 

However, using taxes as a way to re-shape that behavior, we can help boost AD from corporate CapEx.

As we know, a lot of corporations do not pay any taxes. Some pay very little. If we close the loopholes, a lot of the effective rates for these corporations will rise. This in turn will lead them to do everything in their power to return to their previous rate, or a lower rate. We all want to pay the lowest tax as possible, and that is what they’ll strive to do.

Using Negative Reinforcement, we can “forcefully encourage” CapEx. If corporation X wants a 0% tax rate (they will), then they must engage in spending that would not only benefit them, but would benefit the economy. Would they prefer that over giving X amount of dollars to Uncle Sam. I am 100% sure they will pick the former over the latter.

By giving corporations the tax break (via Write-offs or exemptions from Hiring/R&D/Investment) AFTER the desired behavior is completed, this will surely lead to a boost in AD (via CapEx). More people being hired means more spending. More spending leads to more sales. More sales leads to more hiring.

I do not buy the argument that by lowering the tax rates now & closing all write-offs/loopholes/exemptions (something conservatives encourage), that it will lead to automatic growth. It won’t because you are rewarding the corporation before the desired behavior is complete. Also, missing in the conservative/libertarian argument is that the system is corrupt. Yes, let’s say that the loophole was “closed” today. If politicians are are STILL bought, then that loophole will just return tomorrow, effectively giving corporations an easier way to get to a 0% tax rate (or even lower!). Also, I do not want to leave the left/liberals hanging. While nobody passes up a good risk/reward investment if presented with one (despite the tax rate), higher rates could present less opportunities. It will disincentive some investments because of the lower risk/reward it might present.

So, just to conclude. My proposal is to lower the overall tax rate while in the same time getting rid of loopholes BUT keeping reasonable/effective exemptions & write-offs. This is done to shape behavior (of course, we need to get money out of politics first before this can be feasible). My plan will boost AD which in turn could help get the economy going again.

Note: This proposal only applies to corporations. I have a similar but different proposal on non-corporate or small Businesses.

(As an aside: Realize how I did not mention the $FED? I fully concentrated on Fiscal policy. No Monetary policy here.)

 

Tags: $MACRO, $FED

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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