Sunday, April 5, 2015

Grand Bargain on US Corporate Tax Reform is Needed for Sustained Robust US GDP Growth

Now is clearly the time for the Obama Administration, led by Jack Lew, to do an all out assault on driving upwardly and on a sustained basis the very tepid US GDP Growth Rate, which has been a python-like stranglehold on the US middle and lower economic classes.

The best way for very robust US GDP Growth lies in wisely-designed and yes wisely compromised US Corporate Tax Reform.

I think the key to jump-starting the US Corporate Tax Reform discussion is for the Obama Administration to pretty much buy in to the Republican position that on an overall basis, there will be no US Tax Revenues raised from it as the CBO measures it in its very conservative scoring.

And then in return, the Republicans have to be open to the position that one of the key desired results is to design US Corporate Tax Reform in such a way that the middle and lower US economic classes directly benefit substantially from it economically ..... and not just abstractly purporting that there will be some indirect benefit from it on a trickle down basis.

I do think that the assertion held in CBO scoring that there will be no US Tax Revenues raised if US long-term GDP Growth were to increase in the range of 1.0% to 2.5% per year to in the range of 3.0% to 4.5% per year makes absolutely no sense.  There will be massive amounts of US Tax Revenues raised from such a pronounced increase in long-term US GDP Growth.  On the other hand, if US GDP growth remains where it is now ..... about 1.0% to 1.5% per year ..... there will be massive amounts of Tax Revenue Reductions from what the CBO is now way too optimistically projecting because it is using much too high of a US Real GDP Growth projection.

A couple of bullet points on the best chance for successful, doable Corporate Tax Reform that substantially elevates US Long-Term GDP Growth:
  • I would try to substantially reduce the top Corporate Income Tax Rate, not to just 28% but to 25%.  How can this be done?  It mainly lies in switching the tax life on all depreciable Property, Plant and Equipment assets to their economic lives used in their audited financial statements.  And it also lies in using mainly straight-line tax depreciation, which is consistent with what 90% of Companies use to depreciate these assets in their audited financial statements.  Companies would love a trade off of the removal of accelerated tax depreciation, including a removal of 50% first year bonus tax depreciation and even a removal of all of the 100% first year tax expensing under Section 179, for a much lower Corporate Income Tax Rate.  In the event that the US economy needs it several years down the road, Congress can always reinstitute Section 179 100% first-year Tax Expensing for smaller businesses.
  • But it's not just Property, Plant and Equipment assets, but all assets on the balance sheet of a Company which I would switch the amortization tax deduction to the longer economic lives used in their audited financial statements, including among many other assets Intangible Assets, Movie Film Costs and Mortgage Servicing Rights.  Companies would prefer the huge Corporate Income Tax Rate Reduction over these accelerated tax deductions.   
  • Nearly all companies would be willing to trade off the removal of LIFO Inventory for income tax purposes for a much lower Corporate Income Tax Rate.   Companies would then switch out of LIFO for financial statement purposes, thereby substantially increasing their reported earnings and also further strengthening their balance sheets.
  • Frankly, nearly all companies would trade off the elimination of nearly every tax loophole for a reduction in the US Corporate Income Tax Rate from 35% to 25%.
  • I would keep only one tax loophole.....the Research and Experimentation Tax Credit, and this one is so important to US economic success, to good-paying US job growth and to US national security that I would even substantially expand it.
  • I would have a progressive Corporate Income Tax Rate something like this ..... 15% for all Corporate Taxable Income below $1 million, 20% for Corporate Taxable Income from $1 million up to $1 billion and 25% for all Taxable Income above $1 billion.  What this substantial drop in Corporate Tax Rates would do is to move many foreign jobs back to the US.  And what it would also do is to incentivize US Multinational Companies, especially the smaller and medium-sized ones, to repatriate back to the US much of their foreign earnings.  Further, these low Corporate Income Tax Rates would flat out stop the many huge Corporate Unpatriotic Tax Inversions that have occurred in the past several years, particularly in the Health Care Industry, which have made massive dents in US Government Tax Revenues and have given unfair economic advantage to these Companies over the many US Multinational Corps that have patriotically decided to not go the Corporate Tax Inversion Route.  The huge US Health Care Companies that have gotten massive US Tax Savings from these Unpatriotic Corporate Tax Inversions are, among many others, Medtronic, Actavis, Mylan, Covidien, Perrigo, Abbvie, Jazz Pharmaceuticals, Endo International, Thereavance BioPharma, Horizon Pharma, Steris, Wright Medical and Walgreens.  The many Companies outside of Health Care taking similar Unpatriotic action include among countless others Eaton, Chiquita Brands, Aon, Stratasys, Liberty Global, Applied Materials and Burger King Worldwide.  Due to these incredibly Unpatriotic Exceptionally Greedy Company-Over-Country actions, I think it is only fair that there should be some form of very substantial US Tax Revenue Clawbacks for these Companies that legally but not in substance moved their Corporate Headquarters to very low-taxed foreign tax havens.  One logical, fair approach to consider here would be to immediately income tax retroactively in the US at 35% all cumulative foreign earnings of US Multinational Companies once they have effectuated a Tax-Dodging Corporate Tax Inversions Scheme.
  • I would consider adopting a Territorial Tax System (TTS), but because of its massive income-shifting maneuverability imperfections, I would allow this TTS only if it accompanied each year by a pretty significant US minimum tax on all Non-US Pretax Income computed under US GAAP, with several adjustments made to it to make it fair to all parties.   
  • For fairness and for further expansion of US GDP Growth, I would also have all Business Income, after elimination of all tax loopholes, taxed at the Personal Income Level, including Schedule C Business Income, Pass-Thru SubS and LLC Business Income and Pass-Thru Partnership Business Income, at the very same Personal Income Tax Rates as I have above for Corporate Income ..... 15% for all Business Income less than $1 mil, 20% for Business Income from $1 mil up to $1 bil and 25% for Business Income above $1 bil.  
  • Items to consider for inclusion in this Corporate Tax Reform in order to accomplish the goal of directly benefiting substantially the middle and lower income US economic classes:
  1.  Expanded Earned Income Tax Credit
  2.  Substantial Increases in US Infrastructure Investments
  3.  Increasing the Federal Minimum Wage but with fair adjustments factored in for location Cost of Living Differences
  4.  Increasing the Federal Maximum Unemployment Wages Used for Employer Federal Unemployment Payroll Tax computation purposes for annual increases in the Cost of Living 
  5.  Private Financial Institutions making Education Loans like Sallie Mae and its successor Navient and many others whose net interest rate margins on these Education Loans are obnoxiously high should be assessed a windfall profits tax at 80% of the amount of the excessive margins they are generating on these Education Loans
  6. Former and Current Student Federal Government Education Loans should be allowed to be refinanced at the lower current market interest rates.  And anyone in the US Congress who voted to not allow or refused to allow a vote on whether these Student Education Loans should be allowed to be refinanced to the current lower market interest rates should be very visibly identified to the US Public for his clearly Pro-Big Financial Institution and Anti-Former-and-Current College Student position.
  7. Enhancing substantially the present US Research and Experimentation Tax Credit, after all this results in the direct creation of many US middle-income jobs since increased Research and Experimentation Costs are predominately New Employee Pay.  If Tax Revenues are needed to pay for this, I would require all R&D expenditures to be amortized over a one or a two year period for US Federal Income Tax purposes ..... after all, the overall average benefit period of aggregate R&D expenditures is much longer than two years.
  8. Some additional incentives need to be implemented to induce Companies to increase their pay to existing employees.  One of the many ways to do this is to reduce Company payroll taxes on the annual increased Payroll Wages, after making adjustments to the computation for fairness.
  9. Many Independent Contractors need to be reclassified to Company Employees.    
Of the above 9 Incentives to directly benefit the middle and lower US economic classes, only 2 of them would need to be paid for with US Government Tax Revenues or US Government Fees.  Thus to make this Grand Bargain totally Tax Neutral, I would pay for #6.....the reduction of interest rates on US Federal Government Student Loans..... by first using all of the windfall profits tax collected from private financial institutions which generate obnoxiously high net interest rate margins on their student education loans and second by using just a small portion of the massive amounts of US Debt reductions resulting from the huge Annual Earnings of both Fannie Mae and Freddie Mac.  And I would pay for #2.....the Substantial Increases in US Infrastructure directly linking them to the huge US Government Corporate Income Tax received from one-time foreign earnings repatriations applied at somewhat discounted US Corporate Federal Income Tax Rates, perhaps something like 15% to 17.5%.