Eduardo Porter had an interesting piece discussing the prospects for tax reform in the NYT. While the piece correctly highlights some of the absurdities of the U.S. tax system, it may have given readers a wrong impression in some areas.

For example, it notes that income-related taxes are a far higher share of the tax burden in the U.S. than in other wealthy countries. It argues that this is bad because income taxes tend to be more of a drag on growth than taxes on consumption.

While there is clearly some truth to this, it is important to note that income taxes are far more progressive than consumption taxes. In other countries, where consumption taxes are higher, the government provides much more generous benefits to the public, such as national health care, more generous pensions, and free or low-cost college education. While it is possible that the public would support regressive taxes that support programs with broadly based benefits, as they do with Social Security, it is unlikely that they would support an increase in regressive taxes that are not tied to an expansion of benefits.

The piece also exaggerates the harm caused by the current tax system when it refers to the profits that corporations keep abroad to avoid paying taxes. There is little reason to believe that companies would invest more in the United States if they claimed these profits here. Corporations are currently flooded with cash, paying out large dividends and doing massive share buybacks. A lack of capital is not a major factor limiting most corporations investment.


The piece also notes that Ireland gets more revenue from corporate income taxes, as a share of GDP, even though its tax rate is just 12.5 percent, as opposed to the U.S. statutory rate of 35 percent. While this is true, this is in large part because foreign corporations doctors their books to have profits show up in Ireland to take advantage of its low tax rate. In other words, Ireland is basically thriving by encouraging tax fraud. This is the sort of thing that international agreements are supposed to prevent.

As the piece correctly points out, there are enormous amounts of resources wasted in tax avoidance schemes. This is not only a loss to the economy, but it is a major factor in the upward redistribution of income. Many people, like private equity partners, get very rich running clever tax avoidance schemes. This is a very good reason to want to crack down on them.

It is possible to think of relatively simple and progressive way to eliminate the corporate income tax altogether. We can just require companies to turn over a percentage of their outstanding stock (15–30 percent, pick your number) to the government in the form of non-voting shares. These shares would get treated in the same way as voting shares (same dividends, same buyback conditions), except they come with no voting rights in the company.

This change would mean that companies no longer have reason to take actions just to avoid taxes. It also means that they wouldn't have to pay large amounts of money to accountants to do their taxes. And, it should be almost impossible to avoid tax liability, unless the company is also defrauding its shareholders.

A nice feature of this system is that it can be phased in by offering it to companies as an option. For example, they can either be subject to the corporate income tax or turn over X percent of their shares to the government. This would allow many companies to take advantage of this opportunity and allow I.R.S. to focus its resources on the companies that think they can profit by getting around the tax code.

But, this is an idea that is probably far too simple to be taken seriously in policy debates.