Many advocate a "Destination Based Cash Flow Tax"[1], which is a Border Adjustment Tax - i.e. the tax applies on the destination of the product rather than the source.
1. https://en.wikipedia.org/wiki/Destination-based_cash_flow_ta...
The answer is simple. Eliminate the corporate income tax, and increase personal dividend tax rates to ordinary income rates.
Then any profits that are reinvested are not taxed, increasing investment, productivity and wages. Any paid out to shareholders for consumption are taxed at the exact same rates any other income gets taxed on, making our personal tax system more fair and progressive.
For those of us (like me) who only really understand taxes in the context of individual earnings and income tax (and the ever annoying property taxes), can you explain why?
It's a sneaky form of tariffs. Tariffs are a terrible idea. Free trade benefits all parties.
Currently there is a large amount of corporate expenses around conforming to and gaming the corporate income tax code. Eliminating the corporate income tax is a massive simplification that not only makes investment more attractive, but it eliminates those costs that produce nothing, and the spending redistributed to actual productive activities that produce goods and services. Finally, eliminate corporate taxes benefits importers and exporters equally, it's not industrial planning to pick or favor winners and industries, it relies on market forces not political ones.
We've opened up free trade, and gotten rid of many hodge-podge, patchy tariffs, but we haven't replaced the wealth/income redistribution with anything else. The tax system is now less progressive than it was.
Every tariff removed should have had the government income it represented replaced with an increase in some other broad-based tax to compensate. Otherwise you're not just making the system less patchy, you're actually just taxing less, and lower taxes generally means worse income and wealth inequality.
So tariffs are a terrible idea, but I think no tariffs at all can be worse. I'd rather have a patchy inconsistent push against rising wealth inequality than none at all.
Get out of here with your genius ideas.
The problem is due to our 2 party divide and conquer system, sane policy like this will probably never happen as it is one for each side, the warring teams of the political sports leagues, red v blue.
If we actually had a system that was based on compromise not dividing, bribery and wealth then this would probably be a good deal.
Please see your sibling comment, authored by me - this already exists and is in wide usage ... almost every (small) business you have ever dealt with works just like that.
The first part "Eliminate the corporate income tax" is lessened by pass-through.
Pass-through taxation exists in LLC/S-Corp/sole-proprietorship which does remove corporate tax and increases the personal income tax level. This is definitely in effect but there are still 9% of tax revenues from corporate C-Corp taxes which some small/medium businesses may be but mostly large corps. So truly corporate income tax still exists and tax games will be played.
The second part "increase personal dividend tax rates to ordinary income rates" is definitely not in effect. Dividend tax rates are 10-15% depending on income and hold time short vs long. The idea is that if companies aren't paying taxes and give that in dividends, revenue is collected more at the non-value creation end just investment end. Which is good and bad but great for cashflow of US companies to not have to pay taxes, lots of that could later be re-couped at dividend payouts.
I agree that it's overcomplicated. Equally I'd argue eliminating corporate tax isn't the right mechanism either, as foreign shareholders could evade US taxes entirely. Which to an extent is an encouragement for investment, but equally it evades the infrastructure the US provides to businesses.
Right now we have the reverse of this - effectively double taxation on dividends for US shareholders (corporate tax and income tax). Dividend imputation is my preferred solution - However, I am biased seeing this in effect in Australia as franking credits.
The Chinese investor isn't a US citizen, doesn't get to vote, or benefit from government programs, isn't using US infrastructure, essentially is a cost-free source of capital. Why would we want them to invest in another country instead?
Even if the business doesn't benefit directly from that infrastructure, they benefit from being present in an economy that supports that infrastructure.
The US is a great place to invest because of that environment, seems reasonable that it has some level of cost.
If this is the true (that high income earners pay very little personal income tax), what you're suggesting would remove all tax on foreign capital and shift nearly the entire Federal tax burden on to middle and low income earners. And I thought the Republican proposal was to halve corporate tax rates and make up the revenue by taxing domestic consumption (in the form of a CFT).
From http://www.politifact.com/truth-o-meter/article/2011/sep/21/...
* Buffett said that his taxes amounted to "only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."
This is already the case for many, many businesses.
"S Corps" (and other passthrough entities) are widely, widely in use and behave just as you suggested - the business pays no taxes, the monies flow to the owners, and the owners pay personal taxes on those flows.
It's very simple and it works very well.
It is not a fringe practice or a weird setup - almost every business you transact with is set up as a passthrough entity.
There is a catch...
A passthrough entity needs to pass all that cash through, more or less, inside of that tax year. You can't just sit on funds or store them up in your bank accounts or save for future R&D, etc. - you need to pass it all through this year.
And so if you are a mega-corp, that is a problem since there are many, many reasons you might want to store funds across several years ... and that is the class (C-Corp) that gets taxed.
So what you suggest is here, now. We, as a society, have decided that there is something negative about corporations slowly building up cash troves year after year without taxation and so we don't allow that. But I see they are doing that anyway, offshore, so perhaps it's time to rethink that...
Citation needed. S-Corps are almost exclusively small and medium businesses.
Eliminating corporate taxes for every U.S. company in the entire country just because a few very large companies have a ton of offshore cash doesn't make sense. And your assumption that it will be made up by increasing dividends seems misguided since the people that decide whether the company pays a dividend are the largest shareholders who want to minimize their own tax burden as much as possible. They'll simply figure out a different way to pay out those gains that don't involve a dividend (more buybacks, mergers/acquisitions, etc.).
I agree that it would be good to figure out a way to bring some of that cash back to the U.S. even at a lower rate, but this is definitely requires a scalpel and not a hatchet to fix.