Current and Proposed Corporate Tax Rates

It’s time. No! It’s WAY past time!!!

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Here, we go. It’s the heart of election season (only because we have made the primary season so long- and have it run right into the national election).   Only, this time, there’s enough talk (but still no action) that maybe we- that’s you and me, folks- can goad our do-nothing Congress into doing something to back up everyone’s polemics.

Aren’t you tired of hearing we need income tax reform?  When nothing is really done.  Well, the elephant in the room is corporate income tax.  Unless and until we fix that portion of our code, we can’t do anything for personal taxes.

Why do I say that?  Because the last time we took action to improve our infrastructure, to improve our schools, to make America great (saying it isn’t doing it), corporations paid at least 25% of our annual intake.  Now?  They pay 10%.  Almost.

From Where Do Our Federal Dollars Come?

Why is that true?  After all, you keep hearing the BS about the 35% tax rate, right?   Well, here’s the dirty little secret about corporate taxes.  It’s only the small companies that can’t evade that rate.  Whether it’s because they lack the sophisticated tax advisors (like us) or because they only operate in the US and can’t hide their profits is immaterial.   Because the fact of the matter is that US based corporations pay an average of 13% of their profits in taxes.

And you’ve heard about the new trick companies are trying, right?  Inversion?  No, they are not turning upside down or inside out.  Instead, they merge with a (typically smaller) non-US entity and then no longer are fully subject to US tax rules.    Wendy’s has done this.  Pfizer is doing it.  And, that’s just two corporations.

But, my plan solves this issue.  And, the key point is that the rest of the world recognizes that they have problems just like we do.  That companies claim they are registered in Lichtenstein or Mauritius or Ireland- and are not subject to their taxation, too.   Which means that my plan has the backing of a slew of governments.   (At one time, it had the backing of an influential congressperson- but elections have come and gone, as has retirement.   Now, it’s just an orphan waiting for a new parent to shout its benefits.  Here I go, right now.)

In America, when you have a company that operates in (basically) one state, you file your federal and state taxes by computing what is called the net income.

Basically, this is the amount left over after deducting your expenses from your revenue.  Except, your expenses do not include 100% of the food and entertainment incurred.   [The government expects us to share in these costs- only ½ are fully deductible.]  And, big ticket items- things like leasehold improvements, new equipment, vehicles- are not fully deducted in a given year.  They are depreciated over their useful life.

[And, no, you don’t get to choose the useful life, the IRS has a chart you have to use.  Moreover, it’s social policy to have companies invest in new equipment- so we let all companies get special deductions above and beyond the normal depreciation- called Section 179 deductions.  That’s why the tax rules are so complicated- we make special exceptions all the time.]

Based upon the net income levels, you pay your taxes.  The rates range from 15 to 39%.  And, no, that 39% is NOT the tax rate for the biggest profits- it’s the rate charged to companies who profit between $100,000 and $ 330,000.  (See!  I told you it’s the SMALLER companies that pay the highest tax rates.)

But, if you operate in several states- say, Virginia, New York, California, Kansas, and Wisconsin- then you have to determine what percentage of your operations are attributable to the various states.  It wouldn’t be fair to pay 8.84% to California, 7.1% to New York, 7.9% to Wisconsin, 7% (or perhaps 4%) to Kansas, and 6% to Virginia.   Because that would mean you were paying more than 36% in state taxes, too.  No, we apportion our basis according to the amounts of gross revenue, payroll, and assets in each state as a percentage of the totals.  These three amounts are then averaged to determine the percentage of the tax rate paid.

As an example, let’s assume that our Virginia payroll was $ 1 KK (overall payroll is $ 1.5KK), our gross sales in Virginia was $ 9KK (overall sales of $ 99KK), and our assets in Virginia totaled $ 945K (with total assets of $ 2KK).   In Virginia’s case, the sales is double weighted (meaning that we add the sales percentage in twice and divide the total by four).  That means we would add the three percentages- 0.67, 0.09, 0.47- and again the sales of 0.09 for a sum total of 1.32- and divide it by 4 to obtain 0.33.  This means we owe Virginia 0.33 X 6% or a 2% tax rate.

New Corporate Tax System

Now, you can see how this can be extended for federal taxes on worldwide companies.  If we only operate in the US, it’s a simple calculation.  We owe the US government the appropriate tax rate.  But, it we operate in 2, 3, or 180 countries, then we use the apportionment factors to compute the appropriate tax rate.

No more can we hide profits in various countries.  Because if ½ the company’s sales are in the US, 2/3 of it’s payroll costs, and 1/3 of its assets, then we can see the apportionment is 0.5, 0.67, 0.33, and 0.5- for a total of 2- which when divided by 4 means that ½ of the tax rate for our profits are due in taxes.

Now, this means that a lot of the money that’s been hidden for years will now be subject to US collections.  And, while we want companies to pay their fair share, we don’t want them to pay through the nose, either.  So, the first thing we do is realign the tax rates.   Dropping them to those shown below.

Current and Proposed Corporate Tax Rates

But more importantly, we include an attenuation clause.  Because it’s pretty certain we will be collecting a lot more taxes from corporations around the world.  We need to examine the tax collections for all US companies; for every year in which tax collections exceed 50% more than the year before, the tax rate is lowered by 1% across the board.  For ten years.

And, the rest of the world- or at least the member states of the OECD (the Organization for Economic Cooperation and Development)- plans to introduce the same system.   Because they want their fair share of taxes, too.

Now, that’s progress.

 

 

 

(By the way, these new revenues can be immediately put to fixing our infrastructure.  And, then after two or three years, we can lower the personal tax rates- or not.   Because when it comes to the personal tax rates, we need to reflect on the ridiculous number [and amounts involved] of tax preference items.  And, remember- one man’s (or woman’s) loophole is another’s critical tax benefit.)

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