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Thursday, October 20, 2016

Strategic CSR - Corporate taxes

The article in the url below covers a topic I have been thinking about for a while – corporate taxes. In particular, the appropriate level of corporate taxation:
"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."
In order to achieve this, most corporations are adopting ingenious schemes (many of which skirt the fuzzy boundary between avoidance and evasion) to pay less than their governments have determined to be their 'fair' share:
"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."
The result of these schemes (of which inversion is only the most dramatic) is widespread avoidance, which obviously defeats the purpose of corporate taxation. The common refrain from companies is that they abide by the relevant laws wherever they operate. While probably true in most cases, this reflects poorly on our elected representatives who have failed to pass laws that accommodate the modern structures of multi-national corporations, along with innovations in accounting practices that allow firms to avoid taxes so effectively ("intra-group loans" appear to be a favored ploy):
"Though the United States has the highest statutory corporate income tax in the developed world, … 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."
In response, some have suggested that, due to the ability of firms to stay one step ahead of regulators and the enormous waste of resources avoidance/evasion consumes, we should instead consider getting rid of corporate taxes altogether. A related article in The Economist (the article in the second url below) presents the benefits of pursuing this option:
"Corporate taxes are a poor way to raise revenue. Since the burden is ultimately borne by people, whether investors, workers or consumers, it would, in theory, be more efficient to tax [those people] directly."
One essential element of shifting the tax burden to people, in my opinion, would be to tax capital and income at the same rate. While seemingly attractive, however, the article also indicates the problems that would likely arise if governments pursued this course:
"In poor countries with large informal sectors, big companies are a rare source of reliable tax revenue. In rich countries, wealthy people would doubtless turn themselves into companies to avoid income taxes. For policymakers, therefore, the priority is to make corporate taxes less distorting and less easy to avoid."
In contrast, I wonder if a low tax rate (say 1-2%) levied as a percentage of revenues, rather than profits, would achieve the desired effect (and is essentially how the incomes of individuals are taxed). Although this would penalize firms that are yet to make a profit, it is also true that companies at all stages of development extract a benefit and exert a cost on the societies in which they are based. At a minimum, it would be interesting to see a comparison of the revenues raised by government under the existing system and one based on a corporate tax rate of 1% (or 2% or 3%) of gross revenues. An alternative idea, presented in the article in the first url below, is more creative:
"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. … 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."
The author suggests this would make it much more difficult for companies to avoid paying their 'fair' share of profits:
"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."
And, in order to reduce resistance, the suggestion is that the policy should be voluntary – firms could choose whether they wanted to pay the current rate of tax or, instead, pay using shares:
"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."
Take care
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Get Rid of Corporate Taxes
By Dean Baker
January 13, 2016
The New York Times
Late Edition – Final
Going after Google
January 30, 2016
The Economist
Late Edition – Final