By Mark Scheinbaum
MIAMI - The White House proposal to lower USA corporate tax rates from 35% to 15% might have a tough ride through Congress, but there are many unanswered questions about whether such a move helps or hurts the domestic economy and international trade.
The two articles below (*) are just a sample of opinions dealing with the pros and cons of corporate tax reform. Even with exemptions and loopholes, most corporate taxpayers pay at the highest level of 35% while some others including many small businesses simply “flow through” their taxes from business into their personal income tax rate.
But the Trump Administration is counting on large corporations that have moved offshore for lower tax bills, and startup companies reluctant to pay 35% in tax, to be revitalized and repatriated as domestic entities with lots of new capital and new jobs.
It is a weasel answer, but basically: no one knows the results until the cut is implemented.
There are too many variables (ranging from recession, natural disasters, international conflicts, new technological miracles which make some industries obsolete, etc.) for accurate forecasting. For every TV pundit or economist who says giants such as Pfizer will happily come home to “repatriate” funds in America, there are others who say that much higher tax rates in the past have included periods of low unemployment, low inflation, and economic booms.
One tends to synthesize opinions from real life situations and the need for total tax reform on the personal and corporate level in the United States. This synthesis includes the anecdotal stories of our friends and families who wrestle with long tax forms and arcane accounting rules each year. We all like the deductions and itemization, but when they become a nuisance in terms of lots of cost and paperwork for little in savings, we wonder about “flat tax,” “VAT” or other simplified solutions.
Where does the income come from, if the government cuts its second-biggest tax (corporate) from 35 to 15 percent? What is the “replacement?”
I know it’s a gamble and counter-intuitive, but my guesstimate is that the reduction is “net positive.” In three decades in the world of financial planning, I have seen and heard too many examples of money “tied up” in assets because the owners or the management did not want “to get hit with that big tax bill.” With so many exemptions and accounting techniques allowing the big boys such as Pfizer to pay as little as 7% in actual taxes, you would think all people would love the current system. But in reality, the loss of real dollars which have represented family or corporate assets for decades is a category killer for capital formation and expansion.
Planning for a merger, acquisition, expansion, combination, takeover, or new venture in an environment in which you absolutely know in advance your maximum 15% tax liability would be a plus. It encourages risk.
Yes, risk encourages economic expansion and is the building block of capitalism.
Finally, a comprehensive tax reform law for individuals and companies discourages the underground economy and a shadow world of off the books workers who are both legal and illegal. It discourages cheating because the cost of playing by the rules becomes easier and cheaper.
So, in the final analysis no one knows the outcome for sure, but the risk-reward of cheaper tax levels in easier reporting formats might be a huge catalyst for both revenue and job growth.
Mark Scheinbaum is managing director of Shearson Financial Services LLC, in Boca Raton, Florida, MScheinbaum@Shearsonllc.com and is a former business editor and publisher. He is Adjunct Professor of International Relations at Florida International University. His opinions do not reflect the views of his firm or its clients.