September 4, 2014

A Thought about Corporate Taxation

Let me begin by admitting that our system of corporate taxation is out of whack. It is not clear that corporations should be taxed at all. Our system taxes productivity and distorts the evaluation of costs and rewards. And it results in huge expenditures devoted to tax avoidance. Despite the notion that corporations are “people,” they are certainly not natural people who can enjoy profits. Only natural people—think stockholders—can ultimately enjoy the fruits of corporate earnings. It would make infinitely more sense than our present taxation method to drop corporate taxes and to tax all income at the same rate.

That said, it must be admitted that, in the current climate, major changes to the U.S. tax system—in anything important, actually—are impossible. Until the Republican Party regains its sanity or is destroyed—the latter eventuality seems preferable—we can make changes to our system of taxation only at the edges.

This brings me to the real subject of this post, but I want to begin with a disclaimer. I am not an economist, tax expert, or even a business person. I can, however, think logically. I’m sure that what I am about to propose would, in practice, have to be more complex than I can possibly imagine. I leave the pragmatic details to others.

There are untold billions of dollars, perhaps even trillions of dollars, being held by U.S. corporations overseas. The government would like this money to be repatriated, so it could be taxed. That is not happening because the corporations do not want to pay the 35% corporate tax on the money. Of course, these corporations virtually never pay the nominal rate, but, in any case, they would like to bring the money to the U.S., where it could be paid to stockholders, and pay as little tax as possible.

There are legislators who would like the government to allow corporate money held overseas to be brought to the U.S. and taxed at a rate lower than 35%, probably much lower (e.g., 3%). From one point of view, this looks like a win-win situation. From another point of view, it looks like a major corporate giveaway.

Those carrying water for corporate giants argue that corporations need an incentive to bring money into the U.S. I agree, but lowering the tax rate so that the government gets only a pittance out of the deal is not the only mechanism for providing incentive.

Here is another incentive idea: Increase the tax rate on monies brought into the country to, say 45%, beginning in perhaps six months. If corporations transfer the money to the U.S. promptly, the corporations would lose nothing—they wouldn’t gain anything, either—and the government would get the taxes to which it is morally entitled.

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