Are tax incentives as effective as assumed?
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In the last week or so a GAO study made the rounds regarding the number of companies paying no corporate taxes in the US in recent years. From the article:
Most U.S. and foreign corporations doing business in the United States avoid paying any federal income taxes, despite trillions of dollars worth of sales, a government study released on Tuesday said.
While there was obviously a lot of noise from the left questioning why we should look at cutting corporate taxes, and from the right citing effects like the Laffer curve, one issue I saw little discussion on was how this impacted the effectiveness of tax-break based corporate incentives. Currently Obama and McCain have a number of proposals favoring more market based approaches of using tax breaks and credits to influence corporate policies. However, if a large number of US companies currently (through legit or questionable finances) have zero-tax liability anyway, how does the carrot of a “tax-break” offer them any incentive to modify their behavior? I realize this is a bit of a generalization, but on a basic level, you need to pay taxes for the offer of a tax-break to be an incentive. So if your incentives are all but useless for a good number of companies, is such a policy as effective as we would assume?
Jeremy,
Don’t fall for the slipshod and biased reporting.
Of the firms that pay no taxes, the overwhelming majority of them had no income, largely because they were small businesses whose owners were taxed less by paying themselves wages.
According to Kevin Hassett of AEI, 3/4 of firms with sales over $50 million DID pay taxes in 2005, and the rest did earlier in the time period studied.
DJ,
I’m not arguing whether they should or shouldn’t pay taxes. But presuming you’re correct and that many of them were S corps or similar and as such payed little/no corporate income taxes, how effective would corporate tax breaks be at influencing their behaviors? IIRC small business employ >50% of US workers, a good portion of which i imagine are S corps due to the tax advantages. In general, are corporate based tax credits applicable to such entities, since the “company” pays limited to no income tax?
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