Tax Changes ARE Coming. How the US should fare.

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Yesterday, I explained how the OECD is proposing a tax plan similar to one I’ve been advocating for years.

The OECD is proposing a new tax system called BEPS- Base Erosion and Profit Sharing.   The program is predicated upon the multinational entity providing its revenue, profit, employment, capital, and assets in each national jurisdiction.  Oh, and that (the ratio of national versus international) will set the portion of the local tax rate these firms will pay in each location around the globe.

That’s basically my plan, so I can fully describe what this will mean for US tax collections and corporate coffers.   And, my plan had attracted the actions of a few congressmen and senators- before the elections changed their ability to act.  These folks knew full well that the US must fix the corporate tax situation before any changes can be made to the personal tax rates and systems.  Because the funds our government collects really come from very different sources than most (big-mouthed, lying) politicians routinely decry.

You see, about 45% of federal receipts comes from employment taxes.  That’s the 7.65% that folks pay out of their paychecks (or net income, if they are self-employed) for Social Security and Medicare taxes.  And, that amount is matched by the employers, so the employment taxes amounts to  15.3% of total wages paid.  (Actually, it’s a little lower, since the self-employed get a slight credit against their taxes)   With Americans earning some $ 14+ trillion in wages, you can see that the contributions funds from this source are over $ 2 trillion.

Then, there’s the 45% of total collections the US receives that are derived from personal income taxes.  Yup, that’s another $ 2 trillion.   And, unless and until we get the corporations to contribute more than the 10% of the total, we won’t be able to change the tax rates or structures for individuals.   Because there’s no room for error.

So, let’s consider a few basic corporate tax facts.  One which you always hear- that the corporate tax rate is too high- and that rate is 35% of gross profits.  The problem is that this is the tax rate paid primarily by small companies, who don’t hire the best tax advisors- or professionals who own their own corporations (their tax rate is set statutorily at 35%).   Most bigger firms pay tax rates that range from 0 (yes, ZERO) to 15%.  So, let’s stop bandying about fictional events.

We also can’t decry the fact that many companies pay zero taxes because they suffered major disasters.   Things like the Sandy or Katrina hurricanes that wiped away whole facilities.   Or, those companies whose properties were destroyed by some of the wildfires traversing the US.

No, I want to mention firms like Lear Jet.   You know,  this ‘small’ firm that had gross revenue of nearly $ 15 billion with a profit of $ 680 million (these are 2012 figures).  And, the taxes they paid?  Oh, they got a $ 600 million refund- because of tax credits.  Or D.R. Horton with profits of $ 322 million on sales of $ 4.7 billion- who received a refund of $ 673 million.  Or GE or Boeing who didn’t pay any taxes.

So, let’s not keep BS’ing citizens with this bogus 35% tax rate.  Sure, the smaller companies may get sucked into paying that rate, as is true for many of electric utilities.  But, Big Tobacco?   The 12 companies in this sector averaged a 26% tax rate.   Or, the 264 biggest medical device firms that paid 11% or those 337 among Big Pharma-5.6%.   Yup, you get it.  That 35% tax rate is pure fiction.

Now, there’s yet a bigger fiction.  The taxes these companies report to stockholders that they pay- and what they actually paid.  Apple?   In 2009, they told stockholders they had a $ 3.8 billion tax bill.  But… they only paid $1.68 billion.   Or, in 2010, when the said it was $ 3.88 billion, but only shelled out $ 1.2 billion.  Then, in 2011, they claimed they owed $ 6.98 billion- but only shelled out $2.58 billion.   So, you should no longer be surprised that the big firms are sitting on boatloads of cash.  It’s the money they’ve been stealing from their stockholders by not paying the proper dividends, by not investing this cash in new plants, or paying their employees fair compensation.

That’s why I proposed lowering the maximum tax rate IMMEDIATELY to 25% – and setting the minimum tax rate at 10%.  That will set the other tax rates for corporations at 15, 18, 20, and 22%.   (The 25% tax rate will apply to firms that have more than $ 10 million in taxable revenue- profits, in other words.)Current and Proposed Corporate Tax Rates

But, we need to tax these firms based upon their gross revenue, gross payroll, and gross space and assets.  No, not the total amounts.   But, the percentage of gross revenue they generate in the US as a percentage of overall revenue.  The percentage of payroll in the US compared to total payroll.   (NOTE:  Subcontractors and 1099 employees do NOT count as payroll.) And, space and assets as a percentage of their total assets and corporate office/warehouse/production facility space.   Then, one averages the three values and pays that percentage of the tax rate that applies to their total profits. New Yax System for MultiNationals

The chart below will show how these sort of computations will affect some multinational firms.  (You do realize that if you only operate in the US, you will be paying 100% of the appropriate tax rate for your profits, since you generate all your money in the US.  But, these rates will be lower than before, because we’ve lowered the tax rates.)

New Corporate Tax System

No more will companies like Apple be able to claim sales in the US were non-taxable because the profits were developed by a zero-employee outfit in Ireland.  Yes, Apple will have its tax rate lowered because of their overseas activities.  But, then, again, most of those Foxconn Technology (really, it’s Hon Hai Precision Industry Co.) folks in China are just contractors for Apple- so the effect of US versus international employment won’t be including those folks.

Now, I am not naïve.  I understand that this is going to raise a lot of revenue for the US Treasury.  Money that has been too long sheltered from the proper tax collections.  So, I also believe that this proposed tax reform must stipulate that when overall corporate collections of taxes increase by more than 100% over the first two years of the new system, then the tax rates need to be automatically reduced permanently by 1% across the board. (That means no further congressional action!)

If the trend continues and the subsequent annual collections are still more than 75% higher over the first three years (after this reduction in rates), then the tax rates should be automatically reduced by an additional 1% (thus making the rates range from 8 to 23%).

It’s about time that the US- and the other countries around the globe- receive its fair share of taxes for the markets, the technology, the production, and the know-how that we offer each and every company that garners sales in this country.

Don’t you agree?

 

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