“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” –Learned Hand, writing in Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934).
“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together. We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.” — Jacob Lew, US Treasury Secretary, July 2014
‘Puter knows Learned Hand has the better of the argument, logically, philosophically and legally, but corporate tax avoidance is a hot button issue these days, so ‘Puter’ll give you his thoughts, some of which may surprise you. (Hint: ‘Puter thinks we should raise personal income tax rates).
‘Puter’s listened to the keening, moralistic rants from liberals within and without the Obama Administration concerning American corporations avoiding taxes through inversions. In an inversion, an American corporation merges with an overseas corporation chartered in a tax-friendly foreign jurisdiction in order to avoid America’s highest in the world tax burden.
The New York Times editorializes today, predictably stating “[i]nversions completed to date are expected to sap the Treasury of nearly $20 billion in taxes in the next decade.” Yes, $20 billion is a lot of money, but it’s a drop in the bucket compared to the approximately $3.7 trillion we’re spending this year alone, much less over a decade. It’s a mere 0.05% of a decade’s expenditures, assuming flat expenditures.
There is a simple way to end the problem of corporations moving overseas to avoid hefty US tax rates: end corporate taxation altogether. Before liberal start reflexively supporting Hamas and buring flags, there are real advantages to eliminating corporate taxes, provided the revenue is recaptured through taxation of individuals.
Ending corporate tax frees up significant capital to be reinvested in business, creating more jobs for current workers or increasing dividends which benefit retirees and pension plans. It also ends uneconomic allocation of legal and accounting resources currently dedicated to gaming a corrupt and unwieldy tax code. Fewer lawyers can’t be a bad thing, right? It also gets the government out of businesses’ shorts, second guessing their allocation of profits and resources, while leaving intact important government regulatory functions like OSHA and the SEC. With no corporate tax code, there’d also be significantly fewer lobbyists plying Congress with trips, campaign contributions and Lord knows what else.
To recover the “lost” revenue, tax all dividends and capital gains on security sales as ordinary income. This eliminates the so called Buffet problem, ensuring Warren (or Jimmy, for that matter) pays the same effective tax rate as his secretary. It also eliminates the Left’s much hated (and rightly so) carried interest deduction that allows hedge fund players to treat income as capital gains for tax purposes. It encourages investors to buy and hold stock, rather than flipping in and out of stocks in microburst trading patterns to take advantage of fractional swings in daily trades since any gain will be immediately taxable as ordinary income when realized. With no artificial advantage to borrowing (interest is deductible currently), corporations would likely equity finance more frequently, meaning less burden on banks and potentially lower leverage rates.
With a zero corporate tax rate, the overseas dollars held by US corporations would flow home. Not all of them, to be sure, but with no tax consequences, capital will go where it’s most efficiently used. And a zero tax rate will encourage other multinational corporations to move headquarters and operations to the United States.
There’s a lot of advantages to getting rid of corporate taxes, but Left and Right will each have to give. The Left will have to eliminate taxes on corporations, and the Right will have to increase taxes on individuals.
‘Puter’s not holding his breath.