For those who still don't understand economics...

[KMAN]

Maybe Fred Smith the CEO of a company called FedEx, you may have heard of it, can explain it to you.

The Weekend Interview - WSJ.com

 

[BaronVonBigmeat]

So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases."

He uses an example from FedEx. "Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate."

Hmm but wait, I thought everyone in europe had higher taxes which led directly to them being a utopia? Oh wait, they do have high taxes but not on capital so they aren't eating their seed corn, so to speak. Truly the devil is in the details.

Next I ask Mr. Smith about the class warfare theme of the political debate. "The politicians deplore the fact that we have a disparity of income," he says, but "the only way to make a blue-collar person earn more is to invest in capital, training and infrastructure. So the more you tax capital, the more you hurt workers." He estimates that about 70% of the return from FedEx capital expenditures is captured by workers in the form of higher wages as their productivity rises.

 

[Sovereignty]

How about don't spend more money than you have. Our government is broke and bleeding do you they understand economics?

 

[Turboswede]

Hmm but wait, I thought everyone in europe had higher taxes which led directly to them being a utopia? Oh wait, they do have high taxes but not on capital so they aren't eating their seed corn, so to speak. Truly the devil is in the details.

In General, most European tax systems apply a (much) lower tax rate at the corporate level. They can afford to do that because:

1. The apply stronger taxes at the individual level
2. Businesses are not permitted to carry forward net operating losses

On point one, The German marginal corporate rate may be 25% (vs. 37-40% in the US) but when the German corporation distributes profits they are taxed at an income rate of (if I remember correctly) 65%. In the United States profits distributed as dividends are generally subject to tax at a 15% rate. The German model encourages corporations to reinvest profits while the US model encourages corporations to distribute profits.

Germany also does not have the same 15% rate on capital gains so that there is more incentive to invest as at a 30% (I think) rate and rules for a Like kind exchange, a German investor will tend to exchange equity for equity rather than sell equity outright.

US corporations are also taxed at a higher marginal rate because they can carry forward losses from previous years and apply they two years in which they posted a profit, one of the things I work on is determining the “effective rate” paid by a US corporation after all NOL carry forwards and deductions are accounted for and it is typically in the 10-15% range.

Now German corporate tax is a complex issue and not my specialty, but as you can see the two corporate tax systems can only be looked at in conjunction with their respective income tax systems, otherwise comparisons are meaningless.

Personally, I don’t like taxes at the corporate level and would like to see the adoption of a system more akin to Germany’s as I think it provides for more long term capital investment and less market speculation. Reducing speculation in the markets makes for a more stable path of growth and fewer “boom and bust” cycles.

I am NOT saying we should eliminate corporate taxes with our current income tax system… that would be irresponsible.