How Trump's Supposed "Tax Cut" Could Actually Get Companies to Pay More

America's soon-to-be 45th president, Donald J. Trump, wants to cut the federal income tax rate U.S. corporations pay from 35% to 15%.

While that appears to be a gift to companies who most Americans don't believe pay their fair share of taxes, it really and truly isn't.

What it would be is a gift to the federal government, and to you, and to me.

Hardly any U.S. corporations, big or small, pay the 35% federal income tax rate in the first place. In fact, the so-called statutory rate isn't a flat 35%, it's a progressive rate that goes from 15% up to 35% depending on how much pre-tax income (before credits) companies make.

The truth is most corporations have a federal effective tax rate (ETR) of about 14%, so making the national rate a flat 15% would be a win-win for the federal government and the average citizen.

Here's why...

How the Tax Code Is Being Used Now

Some people say it's un-American to not pay your fair share of taxes. Others say it's every American's right to pay as little tax as they have to. Everyone says the same thing about companies paying their taxes.

Yet, it's not a matter of what anyone thinks, what matters is the law of the land.

And that means the federal tax code.

The tax code was first written in 1913 as part of the 16th Amendment that created a federal income tax.

The tax code was originally about 400 pages long, but it ballooned to 8,200 pages as World War II wore on. It then exploded from 26,300 pages in 1984 to more than 74,608 pages today.

It's a boondoggle on steroids, but it's the law. However, it's not at all an impediment to people and companies who can afford smart lawyers and accountants capable of parsing the code to their advantage.

To be clear, that's not breaking the law - that's using the law to your benefit.

Like it or not, "working the code" to your personal or corporate benefit to reduce your tax liability is not only legal, it's smart. It has nothing to do with being a good or bad American.

According to a U.S. Government Accountability Office (GAO) report published in March 2016, though the statutory federal corporate income tax rate went from 15% to 35%, from 2006 through 2012, two-thirds of active companies in the United States paid no federal taxes at all. In 2012, of companies that had assets of more than $10 million, 42.3% paid no tax. Of those that made a profit in 2012, 19.5% didn't pay any federal income tax.

The GAO reported that from 2008-2012, large U.S. corporations had an effective tax rate (pre-tax net income minus credits and expense deductions) of just over 14%.

In other words, the so-called statutory top corporate rate of 35% being knocked down to 15% has already happened, at least in ETR terms.

In statutory terms, at 35%, the United States has the highest tax rate in the world. Not that it's alone in the 35% bracket. Other countries that impose a 35% income tax on companies are: Argentina, Zambia, Chad, and the Congo. Venezuela comes in next at 34%.

Meanwhile, Germany's top rate is 12.5%; Canada has 15%; and the UK has 20%.

U.S. companies paying federal income tax are also subject to state income tax, local taxes, and taxes globally where they manufacture or sell their goods and services.

How Donald Can Fix It

Whether you like Donald Trump or not, he's smart about paying taxes. He's used the tax code to avoid paying taxes and he readily admits it. He openly calls himself smart because he uses the law to his advantage. He's used the bankruptcy laws to his advantage, too, which dovetail with the tax code.

He is smart. And he knows how corporations get around paying taxes.

If he's going to propose reducing the federal corporate income tax to a flat 15%, and cut it to that level because he eliminated the thousands of loopholes and deductions that smart corporate tax attorneys and accountants use, then companies will be paying something even though the tax code has been reduced by tens of thousands of pages.

Cutting the top rate to 15% without eliminating loopholes, tax shelters, and other legal back doors that taxable income escapes from, would be an egregious gift to corporations. But that's not what Mr. Trump is advocating.

The battle over taxes will probably be front and center starting this coming Monday, the first Monday of the first full workweek for the new president.

Taxes, and specifically corporate taxes, are going to be front and center. That's because the new president has promised to stimulate the economy by deregulating industries, and there's no faster, more effective deregulatory move the president can push than reducing the federal income tax laws companies have to navigate - including the ones they use to their inordinate benefit.

It's not just big corporations that will benefit by a flat 15% rate. All companies facing a maximum federal income tax burden of only 15% could benefit.

For smaller companies and startups, the great generators of jobs and a rising middle class in America, lots of business deductions should be left in place. Does it really matter if you tax a small company 15% if it's employing people, creating jobs, and careers? No, it doesn't.

America's business future can be shaped by smart tax policy. The incoming president, his administration, and Congress can stimulate business development and jobs growth by making the right moves in tax policies to the point that paying taxes becomes an American privilege.

If that happens, not only will the federal government be able to start paying down its massive debt, you and I will be the beneficiaries of strong economic growth and everything that comes along with it.

On Friday, I'll tackle personal income taxes and what to do about the fact that eight human beings now have more net worth than the world's poorest 3.6 billion people.

Sincerely,

Shah

The post How Trump's Supposed "Tax Cut" Could Actually Get Companies to Pay More appeared first on Wall Street Insights & Indictments.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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