So. Your taxes are too high, the government is incompetent and broke, and even taxing the rich at unconscionable rates won’t balance the budget, let alone reduce the debt. What to do?

Why, sock it to those arrogant, greedy, tax-dodging corporations! What else?

Well, it’s a thought, all right, but not a very good one.

Consider the obligations of a corporation. The first is to its shareholders. They invested money and took a risk, and it is the basis of capitalism (whether we remain a capitalistic society is a debate for another day) that they should take part in any profit made by that corporation. It follows that the corporation should do all that is legally possible to maximize that profit.

Another obligation is to its employees. This is to some extent a moral obligation to offer a continuous job opportunity at fair compensation, but it is also a further obligation to the shareholders to ensure the competent operation of the business and earn profits.

A third obligation is to its customers. They must be well-served in order to guarantee the future of the business, thus providing both employment and profits. In fact, these three obligations are so closely intertwined as to amount to the same thing. If one fails, eventually so will the corporation.

Finally, there is an obligation to the government, which exists only as long as the first three are met. That obligation takes the form of taxes. It is a strictly legal one, and a corporation is no more obligated to maximize it than are you or I.

There is much in the news about corporate tax avoidance, offshore holdings and “inversions,” in which an American company buys a foreign one in a lower-taxed jurisdiction and moves its headquarters there to avoid taxes. All true; also all presently legal.

The reason for all these corporate obfuscations and the employment of countless lawyers and accountants is the tax code itself. Congress has created its own mess.

The United States has the highest nominal corporate tax rate in the Western world: 39 percent. The average in Europe is 25 percent; in Ireland, 12.5 percent. It is only rational that corporations would use these differences to arbitrage taxes to their advantage.

They shift profits to foreign subsidiaries and debt to domestic ones.

Since we are the only country in the world seeking to tax both foreign and domestic profits, they leave money abroad and invest it there.

Here at home, they spend an estimated $3 billion a year lobbying politicians to create subsidies and loopholes to further reduce tax obligations. It is all legal.

This has cumulatively resulted in American international corporations paying actual rates well below the nominal 39 percent, while wholly domestic businesses, usually smaller and less influential, pay something much closer to it.

The answer is not to gig corporations further, but to rationalize the tax code. A much lower rate, without loopholes, and without penalizing foreign earnings, would bring in as much, if not more money, and free up American businesses to focus on earning profits instead of tax avoidance.

This is never going to happen in our present political climate. Bernie Sanders rants about greedy corporations as people who have no idea how a corporation functions cheer him on.

No one dares defend business, at least in part because of the terrible image it has acquired through its machinations to reduce taxes, all induced by the same politicians who passed the tax laws in the first place and now attack corporations that understand them better than their authors.

It is not clear how or when, if ever, we can escape this closed loop. It is reducing GNP and turning society in on itself. Corporations are not inherently evil or duplicitous.

They may be foolish or incompetent to the same degree as their human managers, but when it comes to taxes, they are simply taking logical measures forced on them by the need to meet those first three obligations. Taxes will always be a byproduct.

 

(1) comment

Roger Glass

Consumption tax...nobody pays one dime to the federal gov't until they get a prebate to cover essential needs. Not a VAT, not a Flat tax...pure consumption based on spending after your prebate. Keep 100% of your income, eliminate IRS and stop penalizing those who achieve. It's totally upside down and the elites in DC won't go near it because it would be the largest trans\fer of power form those in DC to the citizens they are supposed to represent.

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