August 10, 2014
Corporate Tax Inversion
Corporations are among our oldest institutions. Something like a joint stock company probably triggered the earliest formal written communication—the accounting ledger. It should be unsurprising that the early traders of Mesopotamia used a corporation. Trade was risky outside the walled city, and spreading that risk over many households allowed for the collection of enough financial capital to pay for prime trade goods, fast mounts and armed guards.
This risky trade had to pay better than baking bread, and so profits to these traders were higher than those to other merchants. Some folks who are sweetly innocent of the workings of the world think these profits are a nuisance and distraction to the workings of an economy. They should be quietly ignored until human nature changes.
Over the past few years we hear a great deal about the evilness of corporations, and how they should not be treated, in law, as people. The latter idea deserves some modest discussion. There is symmetry in the law. If we wish to hold corporations liable for infractions of a law, we must also permit them to speak out against laws they judge wrong, or support those they judge right. It is a simple matter really.
Corporations are easy to demagogue, as is now happening as one political party suffers a summer of discontent. In the coming weeks we will hear how evil and unpatriotic it is for American corporations to merge with foreign firms and so dodge U.S. taxes. This is called 'inversion' and according to White House sources will be the target of Mr. Obama's much anticipated spate of executive actions he will undertake just before the election.
The problem is that this administration has long ignored real corporate tax reform, which could have raised more tax dollars and kept more corporations at home. Here's how that might have worked.
There are so many tax loopholes that a fine team of lawyers and accountants can reduce tax liability of many corporations to zero. As I have mentioned before in this space, GE paid less federal income tax last year than did Ball State. That is not a problem with GE's patriotism. It is a problem with political courage and leadership.
U.S. corporate tax rates are the highest in the developed world, but many businesses can find effective loopholes and pay almost nothing. The tax is complicated and unfair, and that is why corporations who cannot find loopholes are moving overseas. Calling them unpatriotic won't work. They can hire patriotic French lawyers to help them move to Paris, where corporate tax rates are lower.
Corporate taxes are viewed by economists as among the least efficient way to collect revenue. To pay these taxes, corporations reduce their payments not only to stockholders but also workers. Some studies suggest 70 percent of corporate taxes come from wages.
What we need nationally is the type of tax simplification effort that Indiana is now trying. That'll take a bit more political courage and leadership than the current administration can muster.
About the Author
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