Some good advice from Vernon Smith

Growth in both employment and output depends vitally on new and young companies. Unfortunately, U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment. Now the Obama administration is going after firms that reincorporate overseas for tax purposes. Last week Treasury Secretary Jack Lew wrote a letter to the chairman of the House Ways and Means Committee urging Congress to “enact legislation immediately . . . to shut down this abuse of our tax system.”

This is precisely the opposite of what U.S. policy makers should be doing. To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate. Ideally, since young firms generally reinvest their profits in production and jobs, such taxes should fall only on business income after it is paid out to individuals. As long as business income is being reinvested it is growing new income for all.

There are no quick fixes. What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.

That is from an op-ed in the WSJ – read the whole thing.

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18 Responses to Some good advice from Vernon Smith

  1. Craig Mc

    You don’t seriously expect the likes of Obama to understand this? Profit is something that must be avenged, not rewarded.

  2. Makka

    ” “enact legislation immediately . . . to shut down this abuse of our tax system.”

    It’s not theirs, they didn’t make it…

  3. thanks Sinclair, great quote, very useful for something I am working on at this very moment

  4. H B Bear

    Exactly what you would expect from someone who said,

    If you’ve got a business — you didn’t build that. Somebody else made that happen.

    The President formerly known as the Magic Negro and America are following Old Europe right down the high tax, high regulation drain. The future of growth is Asian.

  5. Bertie_Wooster

    Sinc – anyway to get to the article without the paywall?

  6. DMS

    yes, Bertie.

    news corp should have some sort of global passport. I pay monthly for access to News Ltd publications in Australia. You often come across links to WSJ, Times etc but they are always behind paywalls. Even happy to pay a (modest – it’s not that common) premium to my Australian subscription.

  7. 2dogs

    Company income tax should be abolished, and replaced with a system that fully attributes all income to shareholders for tax purposes.

  8. Bruce of Newcastle

    What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.

    The bureaucratic barriers are the worst by far.

    You can look at the tax rate and say, OK, I can pay that. But when you look at the red and green tape requirements its easier to go back to bed and pull the coverers over your head.

    Life is too short to swim through a pool full of legal crocodiles and licence-raj weenies trying to run a business.

  9. Token

    You don’t seriously expect the likes of Obama to understand this? Profit is something that must be avenged, not rewarded.

    The tax eaters will do anything to feed their patronage machine and be able to cover the breaks provided to their cronies.

    Rudd & Gillard were enacting the exact same policies here.

  10. thefrollickingmole

    I have a hard time seeing how company profits are bad on nearly any level.

    1: The company is providing a product willingly paid for, barring exploitation of a monopoly (usually government enforced) or a cartel this is great.
    2: The company provides jobs, removing welfare payments.
    3: The employees pay tax
    4: The company pays the government tax, fees, charges, licenses etc, some approaching eye-watering in their technicality and expense.
    5: The company pays dividends to a wide variety of investors, or just to a single owner, it doesnt matter which.
    6: The risk of failure is high, and the risk is all borne by the investor. (with financial institutions taking a hit as well)

    There is literally no downside to “greedy companies” provided they have effective competition (government regs being a huge impost on any new competitor) and run their business with minimal “cost” to the community at large (no using the kindy kids to absorb the arsenic).

    They are a thing to be encouraged in every way.

    BTW what would an economic balance sheet look like with a 10% company tax and unemployment at nearly 0%? Would the increase in personal tax/dividends taxes and decrease in welfare payments balance out?

  11. .

    Now the Obama administration is going after firms that reincorporate overseas for tax purposes. Last week Treasury Secretary Jack Lew wrote a letter to the chairman of the House Ways and Means Committee urging Congress to “enact legislation immediately . . . to shut down this abuse of our tax system.”

    What about governmental abuse of the long suffering taxpayers?

  12. Company income tax should be abolished, and replaced with a system that fully attributes all income to shareholders for tax purposes.

    On what basis? Company tax is a tax on production, and income tax isn’t? Surely that would simply be a massive tax distortion considering it would exempt reinvestment.

    You can see the outcomes in clubs, where, flushed with excess money, they would refurbish every second year, but for what benefit exactly? Jobs for relos? If you conclude that corporate tax is a distortion, then the same must be said for income tax.

    Sounds like a rort.

  13. Pete

    Company income tax should be abolished, and replaced with a system that fully attributes all income to shareholders for tax purposes.

    Yep, because nothing encourages investment like taxing your minority interest on unrealised (to you) profits.
    Franking credits in Australia leads to the exact same outcome on distributed profits, which is a great way to avoid double taxation.

  14. BTW what would an economic balance sheet look like with a 10% company tax and unemployment at nearly 0%? Would the increase in personal tax/dividends taxes and decrease in welfare payments balance out?

    Like I implied to 2dogs (an oldie but a goodie), company tax, like personal income tax, is an opportunity cost, in that it is money lost that would otherwise be spent elsewhere. Both are effectively taxes on jobs.

  15. Robbo

    Why even bother to try and preach some economic sense to Obama and his lefty mates? They have made a complete pig’s breakfast out of the US economy since they marched into power and now they are coasting along until the next election with the happy thought that the mess will have to be dealt with by Obama’s successor. God help the USA if the new President is Clinton but we can all be assured that it will come down to the voters having to choose between tweedledumb and tweedledumber. In other words business as usual in the hunt for a leader of what used to be a powerful economy.

  16. JohnA

    There are no quick fixes. What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.

    The biggest barrier is their very existence.

  17. You can generally get past the WSJ pay wall by googling the the title and clicking on the link that comes up. It worked in this case, at least from the U.S.

  18. Nato

    Did anyone see the Q&A episode from Geelong?

    The trauma of sitting down to dinner with the remote on the other side of the room and it’s too much hassle until the meal is eaten hot but the first part was too much.

    The Liberal rep was bleating about the grant money available, but she can’t give it away.

    No one thinks of themselves as the instigator. They just want a steady pay check and to rest up after a shift with a hot meal.

    There are plenty of punters with keen skills, but rely on the crutch of someone else to find an application for those skills instead of stepping out yeoman-style, and take full profit instead of surrendering it to the administrators.

    AngryMan who was privileged with many follow-ups wanted to know what government -created jobs were coming. I doubt it even dawned on her to call for small business start-ups to see her for help in creating local employment through private enterprise.

    It was a big-government hand-out to the mono-faceted deadbeat who can’t figure out that even if he’s not cranking his nuts with a torque wrench on on the factory floor that there are plenty of other places for him to do what he loves.

    Once upon a time motivated capitalist fled overbearing government intrusion to the US to be able to step out and ‘make it’ on their own. Now it seems a great many immigrants are chasing the nanny-states condescension. They are chasing the handout amongst 2nd generation Americans who have inherited the profits of the earlier generation’s toil in safety and have made it all the way through university, post-graduate studies and perhaps even an academic appointment without ever being fronted with the bogey of risking anything in the pursuit of the American Dream.

    I can’t be alone in thinking that’s an issue for the West at large, and not just the top half of the Western Hemisphere.

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