Thinking Out Loud: Some Good and Bad
(edited correct an error)
(1) Mark Thompson points out that one of the problems in the existing corporation-regulation relationship is that there is a revolving door between them.
In the security perspective, this is a much bigger problem than the particular symptoms of mangling the tax code. Fixing the tax code is whack-a-mole. Addressing the relationship between regulatory and corporate entities is figuring out how to limit how many moles there are in the first place. Since both Roger and Scott (not exactly idealistic companions) saw merit in the point, I think it’s fair to say that this is a place where we can achieve some sort of common ground. Probably working at this point would be a good start.
So. Maybe we should make that a Symposium topic.
(2) Alan had what Jaybird referred to as a “corker of an idea”.
I’m not convinced that it will work, as originally proposed, but I think this is something seriously worth looking at. If nothing else it represents a truly outside the box thought.
Another candidate is goodwill (edited to fix a copy-paste error), trademarks, and brand value. (/edit) Proctor and Gamble held $2,976,000,000 in Assets in “Patents and Technology” in 2013. They held $31,053,000,000 in “Brand” assets, more than ten times as much. They held, by the way, $139,263,000,000 in total assets… which means about a quarter of the entire assets held by P&G isn’t factories or cash or anything, but simple brand loyalty, trademark protection.
I don’t see any particular reason why trademark protection and patent protection aren’t suitable candidates for taxation regardless of where a company plants its headquarters. It is recognized as a fiscal asset, and it’s an entirely legal construct. We don’t have to tax P&G on their income. We can tax them on their *property*. The brand “Tide” itself might very well be worth more to P&G than any individual account in cash or warehouse line or factory or distribution facility. They can move their income anywhere they want, but if they want the U.S. to recognize their trademark, then they have to admit it’s property, and property taxes are where we should hit them up for their contribution to the commonwealth.
I’m going to simplify the arguments to their least defensible version in order to illustrate points, so don’t think that I’m addressing you directly if you’re the one that made one of these arguments. I just think that some of the arguments are based upon frameworks that everyone’s gotten a tad bit too comfortable with, so I’m trying to step back a pace.
(Argument) If we changed to (a consumption tax/a flat tax) this problem would go away!
(Rejoinder) There are reasons to modify your tax code. “Getting rid of shenanigans for all time” is not one of them, because it won’t work.
The problem with moving entirely to a consumption tax, or any one tax scheme, is that the people with the money will lobby to have the things they want to buy exempted from consumption taxes and by extension the stuff they don’t want to buy will have to pick up the load. This will start approximately two months before switching to a consumption tax: witness PPACA. Before the law was passed, all sorts of embedded interests has lobbied themselves into the concrete.
It’s not rocket science, folks. Basic security principles indicate that changing schemes doesn’t eliminate security vulnerabilities, it just moves them.
In a real sense, the same security vulnerability will be there regardless of tax scheme: it is in the best interests of the folks with the most money to lobby to change the tax code to make it advantageous for them, and they will do that regardless of whether you’re taxing income, land, capital, consumption, vices, whatever. One version of this is what Mark talked about and I already noted.
Over time, whatever method of taxation you choose, the tax code will get labyrinthine again and the loopholes for the least ethical folks will be engineered into the system, and everyone else who benefits will take it because, hey, nobody pays more taxes than they should, amirite? And then you have a vested interest arguing to protect their tax-advantaged status. It’s the reason our existing tax code is the way it is now, the income tax was pretty straightforward when it was implemented, no?
Now, there are reasons to “take off and nuke the entire site from orbit”. If you reset the entire tax code, by moving to one flat tax or any other brand new scheme, the process of embedding all these exceptions needs to start anew, battles for the poor and the rich and other normative guidelines need to be refought. Provided you can start from scratch, this is an advantage. Security is an ongoing process. To use an analogy, we’ll still be pushing a rock up a hill, but we’re choosing a different path and it will roll down differently tomorrow. We’ve learned some things from pushing rocks up hills.
But the fight to keep the tax code square and fair will be an ongoing one, and any advantage you get off of resetting the tax code will not be coming from “this is a better way to make people pay taxes but instead from “we changed the game and now the scofflaws have to engineer new ways to bend the rules”. If your revenues go up and your audit costs go down after changing to a consumption tax, this probably isn’t because consumption taxes are a better way to collect taxes, and twenty years from now changing *back* might be a good idea, because it was the act of *changing* that improved things.
If you want to make the argument that the income tax is particularly *easy* to engineer exceptions into, you can make that argument, but you’ve got a long way to go.
(Argument) Well, it would be cheaper to enforce!
(Rejoinder) If you think monitoring a consumption tax for compliance is cheaper than the task the IRS does now of auditing income, you’ve got no idea of how many different ways I can pay you to do something for me without either of us having to track that cash flow. Now, I will say this: it’s a lot easier to do this on a small scale than a large one, so small Mom and Pop businesses will be able to cheat on their taxes a lot easier than IBM, but that doesn’t get rid of the problem of tax dodging, it just moves the easiest exception scenarios to a different group of beneficiaries.
Side prediction: if the U.S. moved to an all-consumption tax model, cash transactions would jump enormously in the next year, and within ten years we’d have politicians arguing that we really need to outlaw cash and move to a completely traceable currency.
Side-side note: establishing an NIT or minimal income in order to balance the regressiveness of consumption taxes requires folks to agree ahead of time not to mess around with NIT payments in the name of austerity or moral scolding. I don’t know that this is a better war to wage… I’d personally rather have a few rich dickheads bending the law and getting away with it than have a whole class of folks dependent upon a federal income level that could be held hostage every time a political party wanted to get something else done, but that’s just me. I love an NIT in principle, in practice I expect it to be a nightmare.
(Argument) Well, getting rid of the corporate income tax is still a good idea, because of fairness! Why should people who invest have to pay taxes on the same money twice?!?
Unless I’m grossly misunderstanding corporate income reporting rules, I do believe that it is entirely possible for every company in the United States to avoid paying any income tax under any income tax scheme you can envision right now.
Simply declare that all profits in any given year are to be disbursed to the stockholders as a dividend. Basically, whether they legally qualify as an S corp or not, they can act that way. That makes this payment of dividend a business expense, so they don’t have “profit” any more, the stockholders have income instead.
The corporate entity has netted zero income, and all of the folks who are stockholders in the company have that income as normal income and they pay taxes on that accordingly. The government has not taxed them twice, at all. (this is incorrect, but it doesn’t detract entirely from the rest of the comment. However, for the record, this is how I think it *should* be, dividends should only be taxed at the disbursement point).
Businesses don’t do that for several reasons, but what it boils down to is that it is to their advantage and the advantage of their shareholders not to do this.
The business is not, precisely, the stockholders. To the extent that corporations are people, they should be treated like people. To the extent that they are not people (but independent entities with their own agendas and legal existences), we treat them differently from people because of those differences, which are advantages. Taxing them on that basis is clearly a-ok from any one of a number of different perspectives.
Again, the mere fact that they don’t do this means that the corporations and the stockholders are gaining something from not doing it (otherwise, why wouldn’t they?)
So the “fairness” argument probably doesn’t apply at all… they most likely aren’t paying taxes twice. They’re not stupid. They’re paying taxes less than once, or they wouldn’t be doing it that way at all.