Tax Avoidance
I think every economist in [the tax] debate admits, if some reluctantly, that corporations pay no taxes.
American politicians are thinking about changing how they tax businesses. There are good reasons to reform the existing system, but unfortunately the proposals under consideration miss the mark.
An elegant solution, first seriously advocated by Dean Baker, should get more attention. Instead of trying to collect regular payments from businesses based on reported profits, the government should just capitalise its expected tax take up front by demanding nonvoting equity stakes.
People form businesses to make money. Unsurprisingly, governments want to tax these people.
The question is how. Taxing income paid to workers is pretty straightforward. Taxing explicit payments to investors — dividends and interest — should also be easy to do. Same for capital gains when stocks and bonds are sold at a profit.
But a lot of the value created by businesses never is paid out in these ways. Companies might reinvest in growth, or retain earnings by accumulating financial assets, or boost their net worth by paying down their debt. The traditional answer is for governments to tax corporate profits as a complement to other taxes on individuals.
This worked reasonably well in the past, but the share of total tax paid by corporations has steadily dropped in America. [..]
One big reason is tax avoidance via “globalisation”. Just create a subsidiary in a favourable jurisdiction, put your “intellectual property” in the subsidiary, and have the subsidiary charge high licensing fees to the rest of the company. Presto! All the profits end up untaxed. (For much more on this, including the impact on the balance of payments, you should read Brad Setser.)
Baker’s insight is that every stream of payments can be turned into an asset. The government’s legal claim on corporate profits should therefore be equivalent to some proportion of common stock. Shareholders and managers ought to be indifferent between today’s world, and a world where they are diluted by a new share class gifted to the government in exchange for no longer having to pay tax.
There would be other benefits from this reform both to companies and to the economy as a whole. As Baker puts it:
"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"
Rickards