Corporate Taxes: More Trouble than They’re Worth

Image from http://economics21.org
Image from http://economics21.org

A Guest post from Robert Short Sr.

The ofttimes ignored question when tax policy is discussed is, “What is the purpose of Taxation?”, in particular, “What is the purpose of this tax?” The question is important because the common sense answer is to fund the government. Yet most of the time politicians and others don’t even mention this. The normal reason given for a certain tax rate is either to “make everyone pay their fair share”, “punish the greedy wall street leaches”, or “unleash America’s job creators”.

So which is it? Well actually it’s all of the above. Our tax policy is the result of a continual shift in public sentiment. When the public is focused on other issues, which to be honest is north of 99.9% of the time, those with a high degree of interest in the tax code are able to lobby, reason, beg, and bribe their own carve outs into law. But once these carve outs hit a critical mass the public rebels, demanding an end to Crony Capitalism and the corrupt officials who partake. We get inundated with lists of companies that didn’t pay a dime in taxes (a note, these lists almost always only mention income taxes, as a company paying billions in other taxes kinda takes away from the reports message) and so on. This goes on until another soccer ball distracts the public and the process repeats, over and over again.

Not only is this cycle stupid, but it leads to greater corruption and huge amounts of waste. Logic dictates that a company will support any tax cut or loophole that saves it more in taxes than it costs to comply with. Especially since the company can deduct the costs of complying with the carve out from their remaining taxes. Whole industries have come into being merely to facilitate this compliance. Many people make all of their taxable income by helping other people minimize their taxed income. Leading to, by some estimates, up to a million people who are motivated to maintain or increase compliance costs.

According to the IRS, American companies spend over 4.4 billion dollars a year just filing their tax returns, and this is the smallest cost of compliance. According to a study done by Jason J. Fichtner and Jacob Feldman of the Mercatus Center at George Mason University, the total cost of compliance is well over 200 billion dollars a year. To put this in perspective, the corporate tax compliance cost is larger than the economy of South Carolina, larger than the economies of 23 states.

So is there a way to save those billions, get rid of most of the corruption in Washington, “make everyone pay their fair share”, “punish the greedy wall street leaches”, AND “unleash America’s job creators”?

Yes, Virginia, there is a Santa Claus.

End corporate taxes and tax the owners of the companies instead. Rather than taxing profits companies make when they earn them, tax the profits when they are given to the owners, either through dividends or through stock buybacks.

I’ll get to the numbers in a second, but first I want to focus on the aforementioned goals. For starters obviously the switch would eliminate the compliance costs associated with the current tax scheme, and as a bonus it would transfer the compliance obligation to one of the cheapest, in terms of compliance, taxes, the Capital Gains Tax.

Such a change would also upend the current Crony environment of Washington. The reason corporate lobbying is so pervasive is that over 50% of Americans own stock, mostly through retirement accounts, and if someone asked them would they rather the value of their investment go up or down, every single one of them would say up. So companies have a great incentive to make that happen. But if the taxes for corporate profits were transferred to the owners, their incentives would no longer line up as neatly, and it would be much harder to organize an effective lobbying effort to create new carve outs, not impossible but much, much harder.

What’s that I hear? A Bernie Sanders supporter yelling about how this is a give away to big business? Fear not my friend, this plan will ensure that “everyone pays their fair share”. Currently if you are a multinational corporation you can basically pick your tax rate by manipulating where your income is ‘earned’ (a future post will go into this), but if you are a family owned business, a small manufacturer, an Etsy mogul, you cannot, you earn your income here in the US and pay the full amount of taxes. Under this plan the multinational and the mom and pop pay the same amount. The mom and pop are also no longer disadvantaged by their inability to hire someone like me full time to find and exploit the carve outs, like the GE’s of the world can.

Now diverse contingents of folks, everyone from the last occupier on Wall Street to the ardent Ron Paul fans, are thinking what about those who gamed the system. Those who took millions from the government only to screw over the workers? Well, this system fixes much of that. Most Corporate Welfare is not direct payouts; rather it is handled through what are called Tax Expenditures. These have the advantage of not showing up on the budget as actual spending items but having the exact same effect. This plan eliminates every single one of them. Then if Congress wishes to support a private company, it must do so in full sight of the American people.

Additionally, this plan punishes greed. If someone wants to buy a company and bleed it dry, without regard to the workers or common decency, they still can, but they will pay through the nose in taxes. But if someone chooses to buy a company, manage it correctly, and reinvest their profits into the company, they pay no taxes, and get to grow their investment tax deferred, essentially turning every company into a 401(k).

This piece dovetails with the oft repeated goal of “unleashing America’s job creators” (ignoring that it is worker spending that creates jobs in a market economy, not investment from on high). Since the job creators do not pay any taxes on their profits while they are creating jobs, they are incentivized to continue doing so. Only when they choose to take income out for their own use do they get hit with a tax bill. This allows them 100% control over how much they pay in taxes.

Now for the actual numbers, the part of the show where Larry comes out and sings a silly song, (sorry was listening to my kids’ movie in the background). Currently the federal government takes in 300 billion dollars in corporate taxes. Meanwhile, Michael Thompson, Managing Director and Chairman of S&P Investment Advisory Services at S&P Capital IQ the top 500 companies in the US, known as the S&P 500, give back over one trillion dollars in dividends and stock buybacks this year. That one trillion is not the total amount, only the fraction that those 500 companies make up, and that is also after they paid their share of corporate taxes and compliance costs. So this plan could be revenue neutral if all investment income was treated as regular income, assuming no economic growth caused by this plan.

Oh and it would also allow for the repatriation of the two trillion dollars hiding overseas from US taxes (again a topic that a future post will discuss).

But that’s just my two cents.

R.W.T. Short, Sr. is an accountant and veteran of Operation Iraqi Freedom. He is a civil libertarian and Veteran’s Rights activist. He lives in Lynchburg, Va. with his wife of eight years, their three children, their dogs, and a colony of former stray cats his daughter adopted. He can be reached via email at Robert.W.T.Short.Sr@GMail.com and on Twitter at @RobertShortSr.

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