Bill Gates Missing The Point In Tax Analysis 1

Bill Gates doesn’t have a problem with our current corporate tax system.

Well, okay, that’s almost certainly overstating it. I’ve followed a bit of what the semi-post-Microsoft Bill Gates has done, and his viewpoints must be more complex than the sound bite answer we got on the tax system in his Fareed Zakaria GPS interview. However, he certainly implied that, while the current tax system might not be his BFF, it is at least a Christmas Card receiving associate.

I’ve pulled the relevant quotes below. Note that I couldn’t find the actual Fareed Zakaria interview of this part of the discussion, so if you can find it, please link to it in the comment section.

The highest economic growth decade was the 1960s. Income tax rates were 90 percent. The idea that there’s some direct connection, that all these innovators are on strike because tax rates are at 35 percent on corporations, that’s just such nonsense…

Corporate profit as a percent of U.S. GDP, the tax, corporate profit tax, is 2 percent. It used to be 4 percent. That’s at a time where corporate profits are at an all-time high.

What’s actually being paid is way less. And the notion that change in that nominal rate will unlock something, you know, overstates how you improve things.

Politifact rated Bill Gate’s claim as “mostly true,” agreeing that lower tax rates don’t automatically lead to economic prosperity, but noting that without the opposite being said (that higher rates also don’t automatically lead to prosperity), the statement could be misinterpreted.

Just keep staring into that middle distance, Bill.

Just keep staring into that middle distance, Bill.

On that point, I also mostly agree: the economy is extremely complex. We don’t have any one handed economists because nobody’s yet figured out how to make an economic control group. If anyone ever does, I’m pretty sure they’ll get ALL the Nobel Prizes.

So, no, lowering the corporate tax rate isn’t a magic bullet, and lowering rates won’t lead to an automatic win. Just ask Kansas.

Get That Guy From Oz

Before I dig into my main point, I want to address the Straw Man in the room. I like to think I have a pretty good pulse on the various tax ideas floating around and the economic arguments behind them. To my knowledge, nobody believes “innovators are on strike.” I’ve seen that phrase brandied around, but it’s always to describe somebody else’s point of view.

The issue, rather, is that innovators either have to spend more time clearing hurdles than innovating, or that they’re too caught up in the system to even realize they’re innovators.

Maybe it gets to the same place of innovators not innovating, but words are important. “On strike” indicates that they have this great idea but they’re choosing not to bring it to market because they won’t get their desired return. Most tax reformers, however, do not believe it’s the individual’s conscious choice.

The Real Issue

The bigger problem with our current tax system is hiding right behind Bill Gates’ statement. He basically has two key points:

  1. Corporations aren’t really a big piece of the economic pie right now, so changing their rates won’t make that big of an impact.
  2. The average corporation isn’t paying 35% anyway

Both of these assertions are true. But unlike Bill Gates, I believe they are prime evidence of the need for tax reform.

On the first point, of course corporations aren’t that big a piece of the economic pie anymore. They’ve had their lunch eaten by Pass Through Entities. If you need a brief refresher on Pass Throughs, check out this Tax Foundation article, especially the chart about halfway down showing the decline of the traditional C Corp.

To put it in the simplest terms, the traditional corporation (C Corp) has become a business unfriendly way to run a company, so people are doing everything they can to avoid organizing as a traditional corporation.

On the second point, he’s also absolutely right: the AVERAGE corporation isn’t paying 35%. Combine that with the first statement, and the picture becomes clearer: many companies that have remained traditional corporations do so because they have the money to jump through all the legal hurtles. It also gives them the money to hire lawyers, accountants, and, at times, politicians, to help them carve out a favorable tax position for them. And only them.

Combine those two together, and it’s pretty clear that if you’re a new innovator with a great new idea, getting from starting Point A to successful business Point B involves not only the corporate juggernauts like Bill Gates’ Microsoft, but regulatory hurtles and plenty of money. And there’s an entire industry (of which I’m a part) that thrives on that regulatory hassle. An entire industry where we’re sending some of our best and brightest (of which I’m not a part) to cut through red tape, even though in an ideal world their time would be better spent innovating.

Where Does This Leave Us?

Whew. I planned a one paragraph response. It might have gotten away from me.

So let me summarize. Yes, Bill Gates is absolutely right that the economy is a complex beast, and changing the corporate tax rate alone will likely do little in the grand scheme. However, we have an entire industry dedicated to both creating and cutting through red tape, which is costing millions upon millions a year, but in time and dollars, plus shifting potential innovators into artificially mandated jobs.

Changing the rate isn’t enough. We need serious, significant reform. Will that bring us back to the economic growth of the Roaring 20’s or the War Recovery 50’s and 60’s or the Internet Boom 90’s? I have no idea. But it sure couldn’t hurt.

Well, except with my personal paycheck. It could cause serious damage there.

 

  • Jason Hirst

    Isn’t the main argument for lower corporate tax to prevent corporations from going offshore? If so, a comparison to the 1960s isn’t going to be very relevant.