September 19, 2014
The business tax doesn’t usually generate much excitement. But it sure did this summer, when iconic Minnesota company Medtronic announced its intention to relocate their headquarters overseas. Is the business tax a “good” thing because most people don’t pay it? If the business tax were eliminated, would it just benefit “the rich”? Would taxes have to rise for other people? And what of the government services funded by this tax? All of these questions and more will be investigated here.
Medtronic headquarters in Fridley, Minnesota
Medtronic, a company founded in Minnesota in 1949, announced a plan to move its headquarters to Ireland. It’s a move that would save the company millions in taxes each year. What triggered this decision? Minnesota’s business tax has become the 3rd highest in the nation at 9.8% … and that’s on top of the federal government’s corporate tax rate of 35%, one of the highest in the Western world.
In response to this and several similar announcements, President Obama and Minnesota’s US Senators Al Franken and Amy Klobuchar are seeking new restrictions on US companies attempting to do the same thing. They propose a financial fence to hold companies captive inside the US. It’s not unlike the Republican policy of creating a new Berlin Wall along the southern border to restrict travel and immigration. The Parties of Bans and Barriers know only authoritarian solutions.
In sharp contrast, Libertarian candidate for Governor Chris Holbrook has a different idea. He has proposed eliminating Minnesota’s business tax.
Would this proposal benefit the average person? Let’s dig into this issue.
Why Ireland is trumping Minnesota
Consider why Ireland is so attractive. During the Financial Crisis of 2008, it became known as one of the infamous PIIGS. But unlike the others, Ireland responded by becoming more commerce-friendly and by lowering its tax burden on companies to attract new enterprises. It’s working. Today, Ireland is the only one of the PIIGS to experience any significant economic recovery, as this chart shows.
Businesses that do not get started aren’t reported on the evening news. It is unknown to what extent, but the high 9.8% rate is discouraging entrepreneurs from locating in Minnesota. Over time, startups will tend to seek more hospitable conditions elsewhere, choosing to become based in other states. Thus, Minnesota hasn’t been seeing as much benefit from new employment opportunities by these enterprises. However, it’s clear that the high rate has become a serious problem when deeply-rooted companies like Medtronic begin choosing to leave!
Wouldn’t this tax cut just help Big Business?
Fine, one might say, companies will certainly benefit if the business tax is eliminated. But won’t cutting this tax just help Big Business? How about everyone else? Wouldn’t this be a case of the big boys getting a break while the little guy pays more? It’s a common argument.
Minnesota’s business tax, formally known as the Corporate Franchise Tax, acts as an income tax upon companies. Companies must pay a tax on their income, just as individuals pay taxes on their personal income.
What is a company but simply a group of people working collectively to create a product or service, which none could do individually. Working together, a group of people are able to earn money by creating wealth that society needs. That means any taxes also affect the group. And that leads up to how the business tax affects ordinary Minnesotans.
A company must pay income tax on its gross revenue. From the company’s after-tax funds that remain, it is able to pay its owners and employees. But employees must also pay personal income tax on their own paychecks and owners pay personal income tax on any profits withdrawn from the company. That’s called “double taxation”, because the government is extracting taxes from the company’s profits at two points.
However, it’s even worse than that. It might be called quintuple taxation. When the employees become consumers and spend their after-tax earnings, they then pay a property tax if they own a home, or a sales tax or excise taxes on any goods they purchase. The companies which are recipients of this consumer spending in turn pay their own business tax, and their employees again pay a personal income tax. And the cycle repeats!
This layer upon layer of taxation, with the government repeatedly siphoning off revenue at every opportunity, is extracting a massive amount of capital from the productive economy. A person who donates blood might feel a bit weak afterward. But if someone donated blood every day, it would not be healthy at all. This might explain the lackluster economic recovery since 2008.
The public generally perceives taxes as fairly reasonable. That’s because none of these taxes by themselves are terribly burdensome. But all those nickels and dimes add up. Combined, total taxation in Minnesota and the US is very high; it’s estimated that the average person pays over 40% of their income in taxes, and the more wealthy pay well over 50%.
It’s time for a Libertarian solution
What if this dragnet of taxation could begin to be dismantled? The proposal by Chris Holbrook to eliminate the business tax is a piece of that puzzle, and a vital start to a more prosperous future.
Without the business tax, companies would retain more of their earnings. Complete elimination of the tax yields an additional benefit by avoiding all the costs of administrating that tax; those people could be reassigned to more productive endeavors. Of course, companies would see higher profit margins. But those profits must be spent somewhere.
Medtronic developed the heart pacemaker and produces other revolutionary, high-tech medical devices. They’re very good at what they do, otherwise they wouldn’t still be around after 60 years. Higher profits would give Medtronic additional resources to develop even more technologies to help their customers. They could also expand their facilities, hire more people, and afford to give better raises to their current employees, bolstering living standards across the board.
Important disclaimers
The terms “tax cuts” and “tax subsidies” are frequently confused by the media, but the distinction is important. Libertarians support tax cuts because it allows people, including people working collectively through a company, to keep more of their own earnings. By contrast, Libertarians are staunch opponents of tax subsidies, which transfer other peoples’ earnings to politically-favored businesses, handing them funds that they did not earn. An example of such “corporate welfare” is the new Vikings stadium.
It’s also important to point out that, if the business tax is eliminated, Libertarians would not “make up” for it by raising other taxes. That would only play the politics of envy, as the Two Big Old parties so often do, pitting various groups against each other as some seek to line up for the benefits and others try to escape the costs. Nor would Libertarians compensate by utilizing debt, issuing bonds which must still be paid back and with interest.
Libertarians would “pay for” the tax cuts in only one way: by finding ways to reduce government spending.
What about the services funded by the business tax?
A common argument made against Libertarian policies is that important services could suffer. More potholes in the roads, larger class sizes in the schools, etcetera.
But it’s actually not difficult to make significant cuts in government spending, when elected officials make it a focus. Here’s an excellent example. In 2011, Oak Grove, a city in the far northern Twin Cities metro, was able to deliver an 18% property tax cut to its residents after cutting $600,000 in spending. Those cuts had no impact on city services. Here is KSTP’s news coverage on how Oak Grove achieved this.
This rarely happens, though. When the tax checks keep rolling in (after all, people are forced to pay them), politicians have little incentive to look for ways to save money. And it’s easier to raise taxes a little bit more to pay for something new, rather than tangle with bureaucrats or other politicians in the “you scratch my back, I’ll scratch yours” world of politics. That’s why Libertarian candidates must be elected, who have the principles and convictions to push for what’s needed until it gets done! The public might be very surprised to learn how much could be cut at the state level, with no perceivable impact.
Libertarians’ proposal to legalize marijuana, a position also championed by Chris Holbrook, is another opportunity to make cuts. In cases like this, government spending is actually harmful, by placing peaceful people in cages. Ending marijuana as a criminal offense would also save the costs of arresting, prosecuting, and imprisoning people who have harmed no one. The “Libertarian package” of our various pro-liberty positions all tie together by promoting personal freedom AND allowing people to keep more of what they’ve earned.
Even further cuts could be made by replacing government services with voluntary, market-based alternatives. Returning areas monopolized by government back to the marketplace, where entrepreneurs can compete to provide better services at lower prices to the public, would generate a dual benefit of lower taxes AND more choices at decreasing costs. (This is a topic in itself, to be covered in a future Weekly Message.)
The bottom line
Let’s keep our eyes on the prize: a more prosperous society for all. What would happen if the resources siphoned away by government were instead recycled back into the productive economy? Well … this!
Chris Holbrook‘s proposal to eliminate the business tax is sound. It’s a bold solution, and just one of many that Libertarians are ready to offer the public.
For Liberty,
S.L. Malleck
LPMN Vice Chair
Concerned about the expansion of government control and the erosion of individual liberty? Please consider joining and becoming active with the Libertarian Party of Minnesota. Libertarians support liberty on all issues, all the time! Libertarianism is a philosophical and political movement to promote personal freedom, strong civil liberties, a genuinely free marketplace, and peace.
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