Which is sad, because consumption taxes are also fairly regressive.
If we want to move more of the tax burden to corporate profits, rather than revenue (which is what consumption taxes basically are: corporate revenue taxes), you need either international agreements to increase those taxes, or tie profit taxes to local markets.
And now that I think of it, I think that might actually be possible: profit is revenue minus cost, right? With consumption taxes being the same thing as revenue taxes (which I think they are; it's a tax on the revenue corporations get from selling to consumers. Dutch VAT (BTW) is also called "omzetbelasting" (revenue tax).
So allow companies to deduct local costs from local revenue, and you've turned revenue tax into profit tax.
This seems way too simple, so I'm probably missing something here.
Take New York State for example. It has some of the highest taxes in the country. What do the citizens get back? Roads? Well, New York roads are known to be some of the worst in the country. And you still have to pay tolls to use them. Schools? Just average. State University? Again, quite average.
What the heck am I paying for?
Many countries invest in their people, provide education, houses, jobs, services, etc, and as a result, they have a wealthy, educated population that is an attractive market to sell to. But if that country has high corporate taxes, and the company can sell to that market from another country, then they end up paying less taxes and not contributing to the country that invested in that market.
That's what I mean with a race to the bottom. Of course there are other reasons why a company might choose a certain place. New York, despite its bad roads and high property prices, is popular because it's close to Wall Street, for example. But companies that have no geographical ties to New York specifically, will probably put their main office somewhere else. Wasn't Delaware a popular state to register your company?
Though, I think Delaware is past it. Even if they had higher corp taxes than ny, they would still win because of the "service" the judges provide by siding heavily with companies (over workers, consumers and even gov).
https://www.democratandchronicle.com/story/news/politics/alb...
It can be argued that they fall equally on the rich and poor. For example, if the corporation had two shareholders, one in the top tax bracket and one in the bottom, their returns would be equally hit despite difference in their underlying incomes.
On the other hand, if the burden does fall mainly on shareholders then it can be argued that from a macro perspective corporation taxes are progressive since they are ultimately paid by wealthy households (which make up majority of large investors).
The real calculation is very complex and requires deep anaylsis, but let me try to give some concepts on what could happen.
A flat tax corporate tax to every company will have more effects on the consumers than anyone else: investors will invest less than they would have without the tax, as profits go down (and will consume more of their capital), and it will happen until the profits go back to the previous point of equilibrium. They have a 1 time loss, and then never lose profitability again.
If investors dont lose out in the long term, but the state gains through tax, you need to put that on workers or consumers. workers have one trick up their sleeve: they can go independent and avoid corporate tax: either as a small businesses, or being a contractor of some sort. So some workers will win and some will relatively lose.
But the one without much help is the consumer: he cant really buy things that don't go through a private business, which means everything they buy has the tax in it.
And thats a flat tax: its never flat. A local RE developer cannot avoid corporate taxes, but Google that opens offices somewhere else can. Or businesses that have huge potential (again tech) can avoid paying the tax by reinvesting in themselves for decades, which mom&pop shop cant, thus some companies pay more than others. In consequence, more investors go to the lower tax companies, workers will go to those companies and consumers will find their products cheaper.
Still, the idea of ending the race to the bottom by replacing local revenue (sales/consumption) taxes by local profit (sales - local costs) taxes, appeals to me. It would make labour and other local costs cheaper, and discourage outsourcing every aspect of business to the cheapest possible country for it.
The key is to do progressive on the other side. Collect revenue with a flat consumption tax, then pay a uniform benefit, ideally a UBI.
If everybody pays a flat 30% tax rate and then everybody receives $10,000 in cash money, the effective tax rate for someone at $20,000/year is -20%. At $40,000 it's 5%. At $80,000 it's 17.5% and goes up from there.
So it's progressive but there is no arbitrage opportunity, no declaring profits in some other place, no weird cliffs or crazy high marginal rates on the poor due to benefits phase outs, the tax rate is uniform and applies the same to everyone without exception.
Most of this is just characterization. For example, what's the difference between corporate income tax and VAT? Almost nothing. Primarily what happens when goods cross a border -- then VAT requires tax to be paid based on where the customer is rather than which jurisdiction the corporation declares its profits in.
But VAT is a regressive "consumption tax" and corporate income tax is a progressive "income tax"? Which international corporation came up with that particular piece of corporate propaganda?
> So allow companies to deduct local costs from local revenue, and you've turned revenue tax into profit tax.
That's basically what VAT is. You are describing VAT.
If you subtract all costs within that market, including labour, it suddenly becomes more attractive to hire labour in the same market where you're selling. Companies based in tax havens do not get to subtract their costs in the tax haven, which effectively means they have to pay tax on their profit in the market where they're selling rather than the country they move their profits to.
But you do have a good point that it's not really progressive in any way. It just serves our sense of justice to have companies pay their taxes in the same market they're profiting from. I guess the most elegant way to get progressive taxation, like someone else here pointed out, is UBI.
Income tax is really the same thing. A retailer sells a widget for $100 which it bought for $90, so it pays tax on the $10 in profit. The wholesaler bought the widget for $80 and sold it for $90, so it pays tax on another $10. If you go all the way back to the mine that produced the raw materials that were manufactured into the goods, the entire $100 is profit to somebody. It's the same as VAT. Calling it "profit" rather than "value added" is a distinction without a difference.
An exception as you point out is the treatment for domestic labor, but even that's just an accounting anomaly rather than a real exception -- the worker doesn't collect VAT on their "profits" (wages) but then, no deposit no return, the employer can't deduct them. The real scam is when wages aren't deductible from VAT and yet are still subject to personal income tax, which means they're being double taxed. That is one of the few things the US corporate income tax gets right.
> If you subtract all costs within that market, including labour, it suddenly becomes more attractive to hire labour in the same market where you're selling.
If you like VAT you may enjoy DBCFT.
At the end point, VAT is a revenue tax, not a profit tax. And revenue is certainly not the same thing as profit.
Maybe I'm misunderstanding you, but that's kind of how taxes work now. You report your revenue and expenses and pay taxes on the difference.
The challenge is that there are so many loopholes that some companies can reduce their profit to 0 (or less) or allocate their profits to lower tax regions (Delaware).
A revenue tax would be far simpler and eliminate a lot of these accounting loopholes.
For maximum ease, have the banks automatically deduct 5% of each deposit and don't worry about even having to file taxes unless you received cash.
The problem with profit taxes is exactly as you say, but VAT is paid in the country where the consumers live (at least in the EU). This means VAT simple adds to the purchase price, which the company doesn't really feel and ends up basically being the consumer's problem, while the costs and profits are manipulated and moved around so that the company has to pay as little tax on them as possible.
If profit taxes were treated the way VAT is, so the company would have to pay them in the country where they made that profit, which means the revenue in that country minus the costs in that country, that would stop companies from moving their profits around, because they'd have to pay them in the country where they sold their products. And it would make it attractive to make their costs in that country too, rather than outsourcing them to tax havens and low-wage countries.
Despite support among economists, it ended up being politically harder since some companies were against it, so they ended up going with a big deficit-funded tax cut instead.
That's not the problem. Thats the solution. How else would countries compete with each other to not nationalize any company at the whim of a politician.
> you need either international agreements to increase those taxes
You really don't. The US could ban any company with server outside the US and then will not have a problem of jurisdiction. An international agreement means monopolization of government, and thankfully, you only need a few countries to not sign it to keep everything.
Competition is a beautiful thing indeed!
One thing that I wish more people (including me) realize is - these big problems (taxation, immigration, protectionism etc) have multiple angles and many nuances to them, and it is just dumb to reduce them to a simple yes/no type binary question. All this to say, many people including those shouting at each other on television, probably don't know enough to argue one way or the other
The right has been floating flat and simplified tax schemes for decades, including consumption taxes. For example, Hermain Cain made a 9-9-9 Plan a central policy of his campaign.
In Germany, France, Italy, and Spain, corporate taxes amount to 2-2.4% of GDP. The U.K. is at 2.8%, while the U.S. is at 1.9%.[1] Although the U.S. raises more of its taxes from corporations than Germany, France, Italy, or Spain, it has a much lower tax burden overall. However, the absolute tax burden on corporations is not that far off. Germany was at 1.7% in 2012, while the U.S. was at 2.3% in 2104.
Same thing for income taxes: https://data.oecd.org/tax/tax-on-personal-income.htm#indicat.... Income taxes ranged from 7.5% to 10.9% of GDP Germany, France, Italy, Spain, and the UK in 2017. The U.S. was at 10.5%, near the top of the range.
Almost all of our overall much lower tax burden is explained by the fact that our "middle class taxes" are far lower than in Europe. Socials security taxes are 6.3% of GDP, versus 11.5-16.8% in France, Germany, Italy, and Spain. (The U.K. is at 6.4%.) https://data.oecd.org/tax/social-security-contributions.htm#....
Consumption taxes in the U.S. are just 4.3% of GDP, versus 9.7-12% in the U.K., Spain, France, Germany, and Italy: https://data.oecd.org/tax/tax-on-goods-and-services.htm#indi....
What is the policy takeaway? Those on the left point to Europe and say "we should be more like that; those countries have already figured out how to have a fairer, more humane society." What would our taxes look like if we raised the U.S. tax burden to European levels, but also adopted a similar distribution of taxes? Corporate taxes would go up slightly. Income taxes would not go up at all. Middle class taxes would double or triple.
Put it another way. What if we raised income taxes to Swedish levels? We would add about $500 billion in revenue, assuming that did not reduce GDP. Nice, but not even enough to balance the budget. What if we raised consumption taxes to Swedish levels? We'd raise $1.55 trillion, enough to balance the budget, pay for free college, and make a serious dent in universal healthcare.
What if we tried to raise that same money through income taxes? Our income tax burden would shoot to 18.5% of GDP, higher than all but Denmark (which is a huge outlier in the OECD). And what if we tried to raise that money from just the top 1%, like the left wants to do, instead of from everybody, as in Sweden (where the top tax bracket kicks in at $70,000)? You'd have to raise taxes on that group to 100% of income.
[1] I use these countries as reference points because they are the largest in the EU28--accounting for over 70% of the population.
Edit: Just back of the envelope: if median income is 50k and US health costs are 10k/year vs 5k/year in the average EU nation, then healthcare alone could account for a 10% higher "tax" load from the US side. Warren Buffet often laments that for all our obsession about tax rates, the healthcare inefficiency costs in the US are GDP percentage wise, much higher.
The political question is: how do we go from taxes being 27% of GDP to taxes being 37.5% of GDP. (That's the level in Germany, and there is no way we do a welfare state more efficiently than Germany.) That's like $2 trillion. If we raise that money through higher income and corporate taxes, we'd be departing substantially from the norms established by the big EU countries. If we raise that money instead through higher middle class taxes, we'd be keeping within those norms. Not only that, the actual tax increase would be offset to a large degree by the savings to the middle class from not having to pay health insurance premiums and tuition fees.
The calculation is also irrelevant to the question of what taxes should pay for the 9-10% of GDP you want to transition from the private sector to the public sector. Right now, healthcare premiums are effectively a social insurance tax capped at a certain income level. Paying for universal healthcare with an explicit social insurance tax, like in Germany, would keep things within the norms established by Europe. Paying for it with income taxes or corporate taxes, like the left wants to do, would obliterate those norms, catapulting the US to the top of the charts in terms of income or corporate tax burden.
I feel like you’re arguing against a point I’m not raising. I think we should have universal healthcare. I think your calculation shows why the effective tax increase wouldn’t be as big as you might think if you account for the cost of healthcare premiums. My point here is completely different. It’s that we should follow European norms in choosing what taxes we use to fund that transition. Doubling the SS payroll tax would raise about a trillion in revenue, about 5% of GDP. A 10% federal VAT would raise another 5% of GDP in revenue. That tax increase would fall on the middle class, but would largely be offset by savings from not having to pay for health insurance. And the overall ratios of different types of taxes would stay within OECD norms.
“Single payer healthcare is the only solution!”
“What about Switzerland?”
“What about it?”
While there are individual differences, European countries' welfare/tax systems tend to have a lot more in common between themselves than with the US.
The Nordic countries do quite well, but it's on the back of a largely homogeneous population and a significant amount of national wealth from natural resource extraction, and just using the same policies somewhere that isn't the case wouldn't necessarily work. France has generous benefits but such a high youth unemployment rate that people are literally rioting in the streets. Italy is overrun with corruption and people don't pay tax there regardless of what the law says they're supposed to do, so looking at what laws they have doesn't paint an accurate picture of what actually happens.
They're as different as they are the same.
Actually, as a whole, Americans are much less likely to cheat on taxes than Europeans, by a significant margin. This means a lower tax rate in America, when combined with the likelihood of Americans to actually cough up cash, may be on par with a higher tax rate in Europe, considering that Europeans are more likely to be cheaters.
It would be interesting to see an analysis of how this empirical truth affects the percent tax actually paid.
https://www.theatlantic.com/magazine/archive/2019/04/why-ame...
The remarkable thing about the political debate in the US is that folks on the left talk about all the public benefits the government offers in Europe, but are dead silent about how Europe pays for those benefits: consumption taxes. US consumption taxes account for 15% of revenues. That’s just half the OECD average.