WASHINGTON, December 11, 2015 – Recently, candidate for the Democratic Party nomination for president Hillary Clinton, released a number of new tax proposals designed to increase taxes on corporations who “relocate” their corporate headquarters to another country with lower tax rates.
This is known as corporate inversions. She also wants to place a risk fee on the largest banks and raise the tax rate on the wealthiest Americans. Her proposals would be a disaster for the US economy.
Corporate inversions reduce tax revenue for the US government but give corporations more investment capital. Recently US drug manufacturer Pfizer agreed to purchase Irish drug maker Allergan.
Pfizer said they would relocate their corporate headquarters to Dublin.
This will reduce their tax rate from the 27% they paid in 2013 to about 17%. That would save the company more than $1 billion. For a company that spends about $10 billion per year on research, the extra billion is significant.
Many other large corporations like General Electric and Bank of America have similarly “re-located” their headquarters overseas. In fact, experts estimate that up to $2 trillion could be sitting in foreign bank accounts because these inverted companies do not want to bring the money into the US and pay substantial taxes.
Clinton says that by imposing an exit tax, the companies lose the incentive to relocate outside of the US. While that may be true, it also means less money available for the company to invest in research or to invest in their employees.
This slows growth and ultimately puts a drag on the economy which is already feeling heavy burdens due to higher corporate tax rates passed in 2011, the burden of providing health insurance for all employees and the increased regulations passed in the past seven years.
Besides, there is a much better way to resolve the tax inversion problem.
Clinton also wants to raise the tax rate on corporations and on the highest income earners. In 2011, the highest income tax rate was 36%. Obama raised the rate to 39.6%.
Clinton has suggested raising the top rate to 45% or 50%, claiming that the increased tax revenue will be used to fund affordable tuition and infrastructure repairs. She also wants to eliminate loopholes which allow Wall Street workers to pay lower tax rates.
However, raising the tax rates may not necessarily raise more revenue. If the higher tax rate slows growth, total tax revenue may actually decline since the rate would be applied to a lower amount of taxable income.
Similarly she has suggested raising the tax rates on capital gains, which Obama has already raised from 15% to 23.8%.
Apparently she doesn’t take the advice of her husband who, as president, lowered the capital gains tax rate from 28% to 20% in 1996. This resulted in a five year increase in economic growth, a surplus in the government budget and a large decrease in unemployment.
Besides, there is a much better way to increase tax revenue.
The simple solution to ending tax inversions and increasing tax revenue, while vastly increasing the growth rate of the economy, is to implement the Busler Single Rate Tax Plan.
This plans calls for a single tax rate of 15% on all income above a livable minimum (twice the poverty rate) with no deductions for anything.
All income is taxed the same whether it comes from wages, salaries, rent, interest, profit, dividends or capital gains. Corporations pay a 15% rate on all income and pay the entire 12.4% social security tax for all employees.
This lower rate would bring back all American companies who have relocated overseas. It would also likely attract some foreign companies to locate here in the US. This ends the tax inversion problem and would eventually increase corporate tax revenue in the country.
It also eliminates all loopholes so that every American is treated exactly the same.
The plan would be revenue neutral for personal income tax immediately and would lead to future increases in tax revenue as economic growth accelerated. The plan would increase tax revenue from the capital gains tax, as was demonstrated by her husband in the late 1990’s.
Hillary also wants to add additional regulations on large banks which will prevent them from taking large risks. While she believes this is positive, the reality is that risk has to be taken in order to expand.
A similar situation can be seen with the Dodd/Frank bill which was designed to reduce predatory lending, but in reality reduced almost all lending, which partially explains why we have had poor growth since the law was passed.
Hillary should listen more closely to her husband who rejected the tax and spend philosophy. He lowered taxes and declared that the era of big government was over. Hillary wants to do exactly the opposite as Obama has done for the past almost seven years.
And where has that gotten us?