Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

profits plus interest payments (Table 12.2, row 6) must generate the same amount of revenue as the corporate income tax (Table 12.2, row 1). Estimates of the average tax rate applicable to the larger tax base that would have resulted in the same revenue collection range from a low of 8.92 percent in 1982 to a high of 14.64 percent in 1980 (Table 12.2, row 7).

In order to estimate the highest marginal tax rate and to preserve the progressivity of the corporate tax rate, the average tax rate on combined profits and interest payments is multiplied by the ratio of the maximum corporate tax rate (Table 12.2, row 4) to the average corporate tax rate (Table 12.2, row 5). 1 The maximum tax rates applicable to corporate profits and interest payment range from a high of 18.6 percent in 1980 to a low of 11.2 in 1982 (Table 12.2, row 8). The calculation suggests that a tax rate of 15 percent will, on a static revenue basis, generate slightly higher revenue than the current structure.


CONCLUSIONS

The new tax will be neutral with respect to financing choice (i.e., debt versus equity). Therefore, when considering new investment projects, corporate America will now focus on the merits of the project and not on the relative tax consequences. Choice of financing, debt versus equity, will now be irrelevant and will not determine the investment decision.

The proposal we are forwarding in this paper is literally a second-best solution and does entail the elimination of interest expense deductibility. In this case, the old adage that the best should never be the enemy of the good holds. Our proposal is not the optimum optimorum, but it is a lot better than what is being practiced today. Given the fiscal politics of Washington, D.C., our proposal may just be attainable.


NOTE
1.
In a few years the estimated average rate exceeds the highest marginal tax rates. This arises from the fact that NIPA calculations of corporate profits include corporations showing losses during a particular year. NIPA profits tax liability figures, on the other hand, are calculated based only on those companies with positive profits. In this way, the tax base is underestimated and the average tax is thus overstated.

-173-

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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