Slouching toward Tax Reform

By Kevin D. Williamson

Tuesday, January 19, 2016

American businesses are sitting on a very large pile of cash, mainly from profits earned overseas that have not been repatriated. Politicians want to get their hands on that money, because anywhere there is a big pile of money, they want it.

Their plans begin to sound alike after a while.

A. Donald Trump, who fancies himself a Caesar in miniature, declares that he will simply enact a “deemed repatriation,” meaning that if there is no repatriation of those profits, he would simply behave as though there had been one and tax those profits at a discounted rate of 10 percent, as opposed to our world-leading 39.1 percent corporate-tax rate. After that, he says he would simply “end” deferral of un-repatriated income. A president doesn’t have the power to do either of those things, and it’s not entirely clear that Congress really does, either.

B. Vermont socialist Bernie Sanders, the candidate who most closely resembles Trump, has a similar plan: ending the deferral of taxing un-repatriated corporate income (i.e., unilaterally declaring the worldwide jurisdiction of American tax authorities) and unilaterally declaring certain corporations based in foreign countries American corporations for tax purposes. (Imagine the French government suddenly declaring Apple a French corporation for tax purposes.) Like Trump, Sanders proposes to do things that the U.S. government doesn’t really have the power to do — that no legitimate government has the power to do. If a company is incorporated in Canada, it’s incorporated in Canada, regardless of whether Sanders approves of Canadian corporate law.

C. Ted Cruz would abolish the corporate income tax and the payroll tax altogether in favor of a don’t-call-it-a-VAT tax: 16 percent of revenue (as opposed to profit) minus some expenditures, mainly capital investments. Notably, those deductions do not include wages paid, meaning that the employee portion of the payroll tax would simply be enlarged and shifted onto the employer side of the theoretical ledger. (I write “theoretical” because many economists agree that employees in reality pay the “employer portion” of payroll taxes by reducing employees’ wages.) Like Trump, Cruz would impose a 10-percent one-time tax on repatriated profits, though it is not clear whether Cruz would simply deem profits repatriated or wait for them to actually be repatriated.

D. As a senator, Mrs. Clinton was a fan of corporate-repatriation tax holidays, voting for the American Jobs Creation Act, which was intended to bring those expat profits home but failed to do so. Since then, the political winds have shifted, and so has Herself. Her current obsession is the corporate tax “inversion” — merging with an overseas company and moving the corporate headquarters abroad to escape confiscatory U.S. rates in favor of more favorable tax regimes in such right-wing hellholes as Canada, Switzerland, and the European Union. Now her approach to that problem is terrorism, i.e., threatening to use the power of the U.S. government to unilaterally destroy corporate assets by refusing them protection of their patents and other intellectual property. She also proposes to hold corporations hostage if they should choose to relocate abroad, imposing an onerous “exit tax” on their accumulated assets. This is banana-republic stuff, but the Clintons have always had a strong whiff of the Third World about them.

E. Marco Rubio would reduce the corporate tax rate to 25 percent and would have the United States join the rest of the civilized world in adopting a “territorial” tax system, i.e., a corporate-tax regime in which firms are taxed only on business activities that are actually under American jurisdiction. The United States is rare (and among advanced economies nearly alone) in claiming the power to tax business activity conducted in other countries. In that much, Rubio is sober and sensible. Like Trump and (presumably) like Sanders, he would also have the government simply “deem” un-repatriated profits repatriated, and tax them at 6 percent with taxpayers having ten years to pay.

Rubio says that the best way to avoid corporate inversions is to remove the tax incentives behind them. And that’s true, so far as it goes. But a truly far-seeing candidate wouldn’t stop at keeping U.S. firms out of overseas tax havens. The wiser approach is to be the tax haven.

Which is why the United States should have a corporate income tax rate of 0.00 percent.

That isn’t as radical as it sounds. The corporate tax is in many instances simply a tax that sits on top of other taxes paid by corporate shareholders. For instance, corporations are taxed on their income, and they can pay what’s left over to shareholders through dividends, which are then taxed, too. The much more sensible approach would be to tax all income — once — at the same rate, regardless of source, after it hits somebody’s bank account.

There are a limited number of things a corporation can do with its earnings, all of which could be addressed through the individual income tax. As noted above, a corporation can pay out earnings in dividends, which could (and should) be taxed the same way ordinary income is. It can blow all the money on bonuses for its executives, who would then pay ordinary income taxes on it. It can reinvest earnings in the business, making it bigger and more profitable — which ultimately means either wages, bonuses, dividends, or other capital gains, which should be treated as ordinary individual income and taxed in the same way.

Ideally, we would have one flat rate on all income regardless of source — salary, bonuses, capital gains, inheritance, gifts, dividends, whatever. This would have some appreciable advantages: Our tax system would return to doing what a tax system is supposed to do: raise revenue for government operations, not encourage and discourage certain kinds of economic behavior and serve as a system of under-the-table subsidies for political clients. Treating all income the same way and taxing it at the same rate would put all taxpayers on the same side of the issue — taxpayers vs. tax-spenders — rather than enable the current divide-and-conquer model of politics. If you’re a progressive, you should celebrate the fact that it would end the (partly imaginary) situation in which the typical CEO pays a lower tax rate than the typical kindergarten teacher; if you’re a conservative of Romneyesque persuasion, you’ll be happy to see all those tax-beating poor folk finally back on the tax rolls. If you are an economy-first thinker, you’ll be happy to see all that capital and investment pouring into the United States, where it will need firms, factories, and workers. The billions of dollars spent on tax preparation, tax compliance, and tax avoidance would be spent on more productive endeavors. Opportunities for tax-code favoritism would be eliminated. There is more to economic growth than tax reform, of course (the sunnier views of some of my colleagues notwithstanding), but this would at the very least create a lot of potential fuel for growth.

If you’re a deficit-hawk like me, you’ll want to see that one flat rate set high enough to cover what government actually spends every year. And there’s the poison pill: A real flat tax would necessarily mean a very large tax increase on the American middle class. The middle income quintile currently pays around 13 percent per year in real federal income taxes (here I’m combining the income tax and the payroll tax). Figure on doubling that, more or less, if you want a truly flat tax that funds what government actually spends. But that’s not really so bad in the long run, either: There’s no way that the United States will keep up its currently level of welfare-state spending (Social Security, Medicare, Medicaid, welfare per se, etc.) without either a large tax increase on the American middle class or crushing debt and eventual fiscal chaos.

Of course, we could put off some of those hard decisions if Uncle Stupid could get his grubby federal mitts on that big pile of corporate cash sitting overseas. Thus, A, B, C, etc., above, and thus the unwillingness of American firms to bring their money home, where it is within easy reach of said grubby mitts.