A Progressive Way to End Corporate Taxes

January 13, 2016

Dean Baker
The New York Times, January 12, 2016

View article at original source.

En español.

Just about every American chief executive has the same dream: to get out from under the corporate income tax. For many, that means lobbying Congress to change the tax code. But for a growing number, it also involves increasingly creative — and successful — tricks to avoid their liability.

The latest fad is inversion. Over the last few years, some of the country’s largest companies have arranged to be taken over by smaller companies, conveniently headquartered in the Bahamas or some other tax haven. A company then has to pay tax only in the tax haven; it escapes American corporate income taxes altogether. For example, Pfizer, the pharmaceutical company, is being taken over by a much smaller company with headquarters in low-tax Ireland.

Though the United States has the highest statutory corporate income tax in the developed world, write-offs and loopholes have eroded the government’s take for decades. Corporate income taxes were just 1.9 percent of gross domestic product in 2014. That is down from an average of 2.6 percent in the 1970s, even though profits are near a postwar high as a share of national income.

The Obama administration is trying to crack down on inversions, but it’s a losing battle. Other tricks will be found. Which leaves us with two paths forward. If we get less money from corporations, we have to make up the shortfall from other sources of revenue. Or we can come up with a radically new approach to corporate taxation.

The tax avoidance game is an enormous waste of resources and energy. We would like to see Pfizer focused on developing better drugs, not figuring out how to lessen its tax liability. The corporate sector as a whole devotes an enormous amount of money and brainpower to tax gaming, which contributes zero to the economy. Many of the financial wizards designing these schemes get very rich in the process, making tax gaming a factor in income inequality.

For these reasons we should be looking for better ways to extract a share of corporate profit for public uses. Fortunately, there is an old idea that could do the job.

Suppose that, instead of taxing corporate profits, we required companies to turn over an amount of stock, in the form of nonvoting shares, to the government. We can fight over the percentage later (we’d want to match what we ideally get from corporate income taxes now, so presumably between 17 and 35 percent). But first we can focus on the principle.

The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.

This way, there is no way for a corporation to escape its liability. A portion of whatever profit it makes will automatically go to the government. It also eliminates the enormous cost and waste associated with complying with or avoiding the corporate income tax (there would be some start-up and monitoring costs, of course, but nothing like what current enforcement requires). And federal revenues will go up, because companies will have incentive to do what is most profitable, not what minimizes their tax liability.

If we currently had this system in place and Pfizer decided to move to Ireland, its buyer would have to purchase the government’s stake at whatever price it paid for the rest of Pfizer’s shares. Since we would presumably also require that foreign companies making a substantial portion of their profit in the United States grant shares, the Irish company would effectively still be paying taxes here as well.

Ideally, replacing the income tax with stock issuance would be mandatory. But it could be done on an optional basis. We could give companies a choice of paying the current income tax or turning over the designated percentage of shares to the government. If we pick the right number, many companies will go with the share option. This both gets us much of the way there, but also makes it easier for the Internal Revenue Service to focus on the companies that didn’t take the deal. They have told us with their actions that they think they can escape their tax liability.

This isn’t a new idea, per se: It’s been a popular “what if” among academic economists for years. But no one has brought it into the light of policy discussions, because until recently, the corporate-tax system worked reasonably well. You don’t have to be a committed left-winger to recognize that, increasingly, that’s not the case.

The switch from a corporate income tax to ownership of shares wouldn’t be good news for the tax avoidance industry, or for leading tax-avoiding corporations. But it would be a huge gain for just about everyone else.

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