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A Bigger Tax Bill For Google Helps Neither People, Nor Profits

shakedown-1It’s not uncommon to hear populist cries for companies operating under foreign subsidiaries to pay their “share” in taxes or even repatriate assets. What’s extremely rare, however, is a company’s own shareholders demanding they cough up a sizeable chunk of change to Uncle Sam. After all, such an action will ultimately decrease the company’s net asset value, thus penalizing the shareholders themselves. So who would insist on such shenanigans? A faction of Google stockholders.*

At the annual meeting of Google Inc. shareholders, several co-filers, led by the Domini Social Equity Fund, submitted a proposal requesting that the company’s board of directors “adopt a set of principles to address the impact of Google’s tax strategies on society.” Although the actual proposal states that “this is not a vote on tax reform, or how much tax Google should pay,” it goes on to list the following as grounds for the proposal itself:

  • Corporate tax avoidance threatens economic growth and innovation
  • Even if they are within the law, aggressive tax minimization approaches pose regulatory, reputational and financial risks.
  • Other companies have adopted tax policy principles.
  • Google’s tax strategy should be consistent with its stated objectives and policies on social and environmental sustainability.

The consumer group SumOfUs, whose slogan is “People not profits,” also filed an online petition seeking 150,000 signatures, claiming that Google owes $2 billion in taxes worldwide. Marginalizing the importance of the profit incentive undermines the value that Google and other businesses provide. It also overlooks the fact that these dubious profits are used to create jobs, fund research, spur innovation, and generally increase the quality of life for the “people” that SumOfUs seem so concerned about.

While the faction of Google shareholders calling for the company to pay more taxes surely believe themselves to be well intended, they couldn’t be operating further from reality. Corporate taxation itself is one the largest, if not the largest, threat to economic growth and innovation.

With the United States currently boasting one of the highest corporate income tax rates in the world, it’s easy to understand why so many companies flee American shores in search of tax shelters – one of the most basic laws of economics is that when you tax something, you’ll inevitably get less of that something.

Moreover, economist Steve Horwitz points out that a tax on a corporation is not the same as a tax on the wealthy. Individuals end up paying these corporate taxes regardless of wealth, with the working class bearing the brunt in the form of lower wages, higher priced consumer goods, and retirement portfolios of lesser value. Corporate taxes also encourage firms to waste resources on tax avoidance and utilize debt financing instead of equity as a means of decreasing tax liabilities, making the companies riskier.

Tax minimization posing regulatory, reputational, and financial risks is a dubious notion at best. Tax codes exist to subsidize an entire industry whose preoccupation is tax minimization. Google’s significant resources allow them to both comply with the law and achieve minimum tax liability. Simply because other companies, like eBay, have adopted tax policy principles and cost their shareholders billions of dollars, doesn’t make it a smart maneuver. It seems as though Google shareholders have forgotten the “if everybody jumped off of a bridge” quip.

Would you toss half of your company’s annual profits off of a bridge?

But the real knee-slapping dose of irony comes in the assertion that Google’s tax strategy should be consistent with its social and environmental objectives. If the message from this faction of Google shareholders and SumOfUs is that paying taxes is somehow patriotic, perhaps it’s even more patriotic to avoid them. By insisting that Google pay more taxes to the federal government, this faction of shareholders is indeed saying that Google is in favor, or should be in favor, of:

  • Countless undeclared, open-ended wars
  • Subsidizing big business to the detriment of the little guy
  • Prosecuting a drug war that adversely affects poor minorities
  • NSA spying illegally on Americans

The list can go on for miles. Is this really the type of social and environmental construct that Google or its shareholder have such strong feelings about?

*I own Google stock and don’t want them to pay taxes, ever. In fact, I’ll be submitting a proposal to redeem every penny of tax they’ve ever paid.

This post originally appeared at The Libertarian Republic

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Let’s Not Forget How Federal Revenue Shortage Began

My post from earlier this week about big government Republicanism made it into today’s Wall Street Journal. Check it out.

Gary Johnson Reacts To June Job Numbers

Gary Johnson reacts to the June jobs report by issuing a statement via his campaign website:

The anemic jobs numbers for June simply confirm what Americans already know: That employers cannot and will not hire new employees with the federal government continuing to rack up trillions of new debt, a tax system that does all the wrong things, and massive uncertainty about the true costs of impending health care mandates.

Abolish income taxes, repeal the health care mandate, eliminate deficits, and then watch as American entrepreneurs and the private sector put millions back to work.

The time for hand-wringing and nibbling around the edges is past. We don’t need a 10-year plan for balancing the budget; we need a 1-year plan. We don’t need token reductions in income taxes; we need to eliminate them. And we need to elect a President and a Congress who get the simple fact that less government will mean more jobs.

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Image via Gary Johnson 2012

Federal Revenues Are Historically Unresponsive To Top Marginal Tax Rates

With all eyes on Europe as France and Spain struggle to close their budget deficits while global markets anxiously wait for a final Greek exit to put a hole in the Eurozone, things seem quiet on the fiscal policy front here in the United States, but brewing under the surface is another big fiscal fight over the national debt, yearly budget deficit, and the debt ceiling.

One relevant principle in economics is the observable phenomenon that increasing tax burdens hinder an economy’s outputs. In 1913, passage of the 16th Amendment permanently embedded the income tax into our lives, but the seemingly counter-intuitive inverse relationship between taxation rates and tax revenues ever since is well documented. Regardless of marginal rates, tax revenue as a share of GDP remained static in a narrow range of 18-20%, even in the 1960s when the top marginal tax rate was 90%:

tax rates and revenue as a share of GDP Federal Revenues Historically Unresponsive to Top Marginal Tax Rate

Graph via AmericanThinker.com

These are interesting figures for a nation founded on resistance to unpopular taxes. At the Wall Street Journal, W. Kurt Hauser summarizes: “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” If we eliminate the cable news, split screen, partisan mentality from the equation and focus on the numbers, it becomes apparent that we just can’t tax our way to a balanced budget. Economist Antony Davies explains:

“[T]he richest 5 percent of Americans already pay a tax rate almost three times higher than the average tax rate of the remaining 95 percent. It’s hard to argue that the richest aren’t paying a fair share of taxes. Aside from that, for the richest Americans to shoulder the deficit, we would have to raise their effective tax rate to 88 percent. At 88 percent, a family earning $300,000 each year has only $36,000 after taxes—less than the average American earns.”

“The budget deficit is so large that there simply aren’t enough rich people to tax to raise enough to balance the budget.”

Moreover, even if we could eat the rich, the accumulated windfall tax revenue would still end up in the hands of bureaucratic central planners under the false pretense that a single planner can act as an architect of the economic activity of millions of market actors. In The Theory of Moral Sentiments (1759), the founder of modern economics as we know it, Adam Smith describes this behavior by a “man of system”:

“[Such a man is] apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his ideal plan of government that he cannot suffer the smallest deviation from any part of it.”

Economist James Otteson explains Smith’s “man of system”:

“The man of system faces a problem: individual people are not chess pieces to be moved only under someone else’s authority. Individuals make their own decisions and move on their own. When individuals are constantly butting up against demands from the government that they find imposing or contrary to their desires, Smith says, ‘society must be at all times in the highest degree of disorder.’”

But again, our history of marginal tax rates and total federal revenue as a percentage of GDP shows that rather than focus on taxes and revenue, getting the fiscal house back in order requires a sober assessment of the bipartisan spending problem. An intellectually honest dialogue about entitlements, a third rail of American politics, must occur at the national level. In their current structure, spending on programs like Medicare and Medicaid will engulf the budget in the next couple of decades. Any expectation of receiving future benefits from these programs requires serious, immediate cuts.

Mathematically, this perpetual runaway spending is simply not sustainable. No level of taxation will be able to keep it going, as the data above show.

Cross-posted from IVN

Critiquing Cain’s 9-9-9 Plan

When Herman Cain initially launched his catchy, infomercial-like 9-9-9 tax plan, I found it rather amusing. Now that Cain is somehow making waves in the GOP primary polls, 9-9-9 is coming under scrutiny from all sides. The criticisms from the left are predictable; however, I’m more interested in the critiques offered by free market advocates.

Cato’s Dan Mitchell airs his concerns:

Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means — for all intents and purposes — that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

In other words, there are two income taxes in Cain’s plan — the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).

Dean Clancy of Freedom Works shares Mitchell’s concerns:

Cain doesn’t get rid of the income tax. Instead, he reforms it. And then he adds a new levy — a national retail sales tax — on top of it.

[…]

The second problem with Cain’s plan is more serious than the first. It puts in place the infrastructure for a VAT, a Value Added Tax. That’s bad.
No, that’s very bad.

A VAT is a form of national sales tax that is collected at every stage of the process from the initial sale of raw materials to a manufacturer to the final sale of a finished product to an end-consumer. It’s the most insidious of all taxes, because it is built into the price of everything and consumers can’t see how much of the price is due to the tax. When taxes rise, prices rise, but consumers mistakenly assume that’s just market forces at work. Politicians love a VAT: it lets them take a lot more money out of our wallets. And VATs usually exist side by side with income taxes, not in lieu of them. Taxpayers should hate VATs for the same reasons politicians love them.

Reason’s Tim Cavanaugh also weighs in:

Not only has Cain avoided tying his national sales tax to even a vague promise of future repeal of the 16th Amendment (as H.R. 25 does); he doesn’t even want to suspend, let alone repeal, the income tax.

In fact, 9-9-9 is a significant step back from the Flat Tax proposals Republican business candidates used to offer in the Clinton era. In 1996 Steve Forbes got attention for supporting a no-exemptions income tax pegged at 17 percent. That wasn’t perfect, but at least it would have reduced the number of distortions the IRS causes in the private economy.

Now Cain would have you believe that in exchange for a near-halving of a flat tax target that was vaporware when Steve Forbes proposed it, we should agree to give Congress the same power of taxing all business transacted in its jurisdiction that now belongs to your local city hall or governor’s mansion?

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The Growth of Government Since 1980

Celebrating the 30th anniversary of Milton Friedman’s Free to Choose television series, PBS is airing highlights of the series followed by relevant panel discussions. George Mason University Economist Bryan Caplan appeared on one such panel with, amongst others, former economic advisor to President Obama and current University of Chicago Economist Austan Goolsbee.

During the ensuing discussion, Goolsbee remarked that when Friedman’s series originally aired in 1980 he agreed that government was too big and intrusive; however, Goolsbee maintains that today it no longer remains the case. Yesterday, Caplan wrote that he was unable to fit a major point in during the discussion rebutting Goolsbee’s line of reasoning:

 …If Friedman was right then, he’s right now.  Check out Table 15.3.  (Update: Broken link fixed).  Federal spending as a percent of GDP in 1980: 21.7%.  In 2009: 24.7%.  Goolsbee emphasized the shift toward Social Security and health spending.  But so what?  Friedman’s critique is truer than ever.  Government continues to spends a ton of money on people who aren’t even poor.  Much of this spending – especially health care – is pure waste.  And the problem’s only going to get worse.

Goolsbee also emphasized that Social Security and Medicare enjoy strong public support.  Right he is.  So were most of the programs Friedman attacked back in 1980 – and he explicitly admitted it.  Friedman’s point then, and my point now: The public is wrong.  Indeed, the public is delusional.  It’s crazy to tax everyone to provide “free” pensions and health care for everyone.  And it’s logically impossible for benefits to permanently grow faster than GDP.

Goolsbee also argued that government growth isn’t so bad if it’s only temporary.  I wish I’d asked him, “And isn’t ‘temporary’ precisely what price controls on energy were supposed to be?  If Reagan hadn’t been elected, price controls could easily have been as long-lived as rent control in New York.”  I’m afraid the new regulations and spending that the U.S. embraced in 2008 will work the same way.  You can call them “temporary,” but unless a staunch ideological opponent somehow gets elected, the new statism here to stay.

Image via flickr user PeterGuo

Lazy Sunday Links

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