Saturday, November 24, 2012

Just the kind of research paper you would expect from the Gryphon..

Hey All Bloggers!

This is Gryphon here. I hope everyone has enjoyed their Thanksgiving and respective time being thankful and stuff. I know I most certainly have. As most of you know, my college life is consuming most of my time, but I decided that this assignment could serve the dual purpose of being a blog post and a research paper on corporate taxes.( With a title like that, I realize no one will actually read the post. Don't worry about it. It just makes me feel good to post something. :D )

p.s: remember the Prof gave me some really strange parameters. So remember most of the stuff is mine, but there are places where I was forced to insert the "required content". See if you can guess which part wasn't mine. :P

                         Corporate Taxes: A Study That Shows Sometimes Less Really Is More

   Imagine a college student. He had worked exhaustively for the past four years in order to graduate. The courses and challenges of college had been difficult, but the individual endeavored onward, investing immense amounts of time and money into the final goal of achieving a degree. Finally, the student, passing hurdle after hurdle, graduates. The person then sets to searching for a job which will not only pay the bills but also employ the degree he laboriously earned, but opportunities dry up and any openings seem to disappear quickly. As the unemployed graduate grows more desperate, he finally finds a low-level job outside his field, but it at least pays for his expenses.  Now as his college loans start accumulating interest, the bewildered student wonders just where the good jobs he had been preparing for went to.
   This is just an example of a common problem pervasive throughout America today. The economy and job market have stagnated to the point where one of every two college graduates are unemployed “Chew”. Debt continues to grow upwards while the job market shrinks, and businesses do not have the means to continue steady expansion. This weak economy is the result of the economic recession, and, while there are many factors and variables involved in the study of the recession economy, a facet particularly pertinent to the business community and job seekers is the issue of corporate taxes. While the effect of taxation is itself a large complex issue, we can gain a greater understanding of the whole by studying one of the parts. The part that I will focus on is the negative effect of the current USA corporate tax rate on firms and corporations, and why it should be lowered.
  First, before we analyze this toll, it would be profitable to define exactly what I mean by corporate taxes. Corporate taxes are “A levy placed on the profit of a firm, with different rates used for different levels of profits. Corporate taxes are taxes against profits earned by businesses during a given taxable period; “( (Investopedia)”) In approximation, it is a tax placed on the earnings of businesses. By knowing what exactly corporate taxes are, we can now properly weigh it’s effects, and why it should be lowered.
  Now, in a time when the deficit is at an all time high, people having less money to spend, and jobs scarce, many people might wonder at the logic of lowering the tax rate for businesses, but the fact is this is the right time to cut the rate. As of 2012, the United States of America achieved an effective  corporate tax rate of 34.6%,the highest rate in the G7 (the economic planning council) and the  the fourth highest rate in the world. While other industrialized nations have intitated corporate tax cuts for their countries, America continues to have a rate double that of the national average and well above that of other industrialized nations. (Institute)  This has several effects on businesses. Most important is that it destroys the competitive viability of America.  Firms and corporations with the means naturally seek lower tax havens, taking their jobs with them.The Examiner magazine said this, “In an expose on March 27th by CBS's 60 Minutes, hundreds of companies, and over $1.1 trillion dollars, are now being kept overseas providing nothing to the US economy due to stringent tax laws and regulations which make it difficult to invest, create new jobs, and find profitability if incorporated in America.” (Kenneth Schortgen Jr)
  Likewise, the jobs that could be given to American families should be reason enough for alleviating the tax burden. Yet, there are those that purport that these statistics are false or misleading.  Democracy in America, a popular political blog, has stated “Members of the business community, for their part, have long maintained that America's corporate rate, nominally the highest in the world, should be lowered. But that 35 percent rate is more theory than practice. Studies indicate that after tax breaks, the effective corporate tax rate is in fact closer to 25 percent, and one analysis found that nearly 300 major companies paid an average rate of just 18.5 percent between 2008 and 2010.” (R.M.) When reading this, it is important to note that it is true that some of these corporations do pay less than the effective rate, but there is a fallacy apparent in the logic. The article doesn’t go deep enough into the problem. Where did the companies get these tax breaks? They received them by relocating and off-shoring to areas with a more profitable tax rate, which the corporations had to do to avoid the excessive corporate tax in the first place. An example of this would be the tech giant Apple, who built factories in Ireland, routs internet traffic through Luxembourg, and then banks the profits in the Netherlands. All these operations create jobs for these nations, and the reason for this overly complicated trek is that each of these countries has tax laws vastly lower than America’s. In addition, while a select few firms can offshore, other companies cannot afford these loopholes, and the largest percent of taxes fall upon them hardest. (Prante) It is much like the family business or local firm that provides an infrastructure for an area. These small based businesses simply do not have the contacts or resources to relocate to these tax havens, and they must then compete with businesses that have. This presents the dual problems of a foreign based corporate system and also an imbalanced domestic market. An easy solution to both these problems is to lower the tax rate to a value where it is more attractive and profitable to keep their operations in the US. It would
  Similarly, a common charge brought up against the idea of reducing the rate is that the government cannot afford to lose the revenue. These detractors claim that tax cuts do not actually spur on growth, and thereby the government would lose a source of income for no reason. The problem in this is those opposed to the tax cuts make two incorrect assumptions. One, tax cuts do in fact spurs growth. There are numerous historical examples of this very thing occurring. In 1981, the USA had an unemployment rate of 7.5% and corporate tax rate of 46%. After the corporate tax was cut down to 35% by the Reagan Administration, the national unemployment rate fell to 5.0%. These statistics show an enormous growth in employment. Knowing that tax cuts of this kind can spur growth actually solves the second misconception. With the increased growth spurred by the tax cuts, government would actually bring in more income than at higher rates, because it would be getting slightly less from an economic base that is constantly growing, resulting in more income overall. This idea is illustrated handily by an economic model called the Laffer Curve. Created by the economic advisor Arthur Laffer, the Laffer Curve shows a relationship between tax rate and tax revenue. According to the Cato institute, “The Laffer curve illustrates the idea that above a certain tax rate, cuts to the rate cause the tax base to expand sufficiently for revenues to increase. The U.S. corporate tax rate is above that rate, and thus in a strong Laffer zone.” (Edwards)  The Laffer Curve is also handily shown true in real world examples. In 1985, Ireland had a corporate tax rate of 50%, but their overall corporate tax revenue was only 1% of their Gross Domestic Product. Over the next nineteen years the Irish government underwent a series of reforms that lowered the rate down to 12%, and coincidentally the corporate revenue skyrocketed to 3.6% .This is an increase of roughly 300%.  What we see in these examples is basically the ideal Laffer Curve effect. Although, with this diagram in mind, it is important to note that not all tax cuts have this dramatic of an effect. In order to be most effective, corporate tax reductions must be employed in proper areas and are only one piece of an economic plan. But, as these examples and models show, the use of tax cuts is a powerful positive economic stimulus.
   With all these facts, statistics, and arguments, it all boils down to one simple question. What does it matter? Perhaps economics and politics do have some meaning, but is it truly worth wasting time thinking about it? The answer is yes. We could ask that same question to our College graduate locked in a spiral of debt. Perhaps one of the companies that were forced to offshore might have had a job for him. Maybe he could have found employment with a local business, except that businesses are not hiring because they have to deal with an unfair tax system and ambiguous competition. If you could ask this individual or countless other unemployed people, I think they would tell you anything affecting business is of the utmost importance to them.
  On the other hand, one could even expand the observation further. What about the family and relationships of this graduated individual? The only job he can find is one that only just fulfills his needs. It definitely doesn’t leave any left over to stop his college debt from accumulating interest. The stress of his situation taints many varied areas of his life, from his self-image to his relationships. He would feel stuck in this cycle. Alternatively, it might be imagined that the graduate could move to get one of the few jobs out there. While this scenario is much better than being unemployed, it also strains any relationships he might have had, and it removes any developed structure for the newly employed to lean upon. These symptoms of extended unemployment and desperate employment cause not only economic disturbance but also psychological tension.
   Understanding all the evidence presented hitherto, one can see the damage done by the inefficient and detrimental corporate tax system. Jobs, profits, revenues, economic security, and growth, all these items are endangered for everyone by an economic policy that discourages internal and external competition. Hopefully, the American policy will soon swing to support a stronger pro-business stance, because it would be a senseless shame if the American people continued under the misconception that corporate tax cuts are the problem, when in fact they are part of the solution.

 Works Cited
Chew, Kristina. 1 in 2 College Graduates Unemployed or Underemployed. Ed. inc. 22 April 2012. Web. 23 November 2012.
Edwards, Chris. Coporate tax laffer curve. November 2007. Cato Institute. Web. 23 November 2012.
Institute, Cato. New Estimates of Effective Corporate tax Rates on Business Investment. na February 2011. Cato Institute. Web. 23 November 2012.
Investopedia. Corporate Tax. n.a. ValueClick, Inc. Web. 23 November 2012.
Kenneth Schortgen Jr. US corporate tax rates the primary cause for companies moving overseas. 11 March 2011. Clarity Digital Group LLC d/b/a Web. 23 November 2012.
Prante, Drs. Robert Carroll and Gerald Ernst & Young LLP. Long-run macroeconomic impact of increasing tax rates on high income taxpayers in 2013. na July 2012. Ernst & Young. Web. 23 November 2012.
R.M. The trouble with tax reform. 4 Febuary 2011. The Economist. Web. 23 November 2012.