Real Corporate Tax Reform

E. F. SchumacherAh, corporate tax reform! Pundits all around love to talk about it. Those on the right love to shout about how we have the highest corporate income tax in the advanced world. (They never tell you that we have one of the lowest effective corporate income taxes in the advanced world, but we’ll leave that for now.) Liberals love to opine about how we could replace the corporate income tax with something that was fairer. But it gives me a snorgasm or worse! Whenever I hear the words “tax reform” put together, I think, “Lower taxes on the rich and raise them on the poor.”

There is a fundamental problem with corporate taxes. Corporations have lots of money that they can spend (Tax free!) on accountants and lawyers who work to find ways to avoid paying taxes. It has always seemed an unsolvable problem. But not all the really smart people are working to reduce taxes on corporations. Some time ago, the great economist E.F. Schumacher came up with a great idea. Dean Baker explains:

Suppose we give companies the option of giving the government an amount of non-voting stock (I would suggest something like a 30 percent stake) which would be treated exactly like the company’s common stock, except without the voting privileges. This means that if the company distributes profits to the shareholders through dividends, then the government’s shares get the exact same dividend. If it buys back 10 percent of its shares, then it also buys back 10 percent of the government’s shares.

This is brilliant. There is no way for the corporation (and by extension it owners), to avoid paying taxes. Anything the corporation could do to avoid showing profits would anger the share holders. If they are going to get paid off, there is no way to avoid also paying the government. That’s the kind of system that we need. If you think about it, it is a way to approach corporate taxes the same way we approach regular employee taxes: when payment is made.

Of course, I can imagine what conservatives would say about this. “This is a government takeover of business!” But it isn’t. These would be non-voting shares. It is just a mechanism that allows for the efficient collection of taxes. And that’s the real reason that conservatives would hate it: because big businesses would hate it. Note that the current corporate tax system is worst for small companies, who generally do pay the 35% even while the average rate paid (because big companies often pay little or nothing) is only 12%. But there is perhaps even a bigger problem with the plan: its simplicity. Simplicity puts accountants and lawyers out of work. And to some extent, it puts politicians out of work as well.

As Baker says, “It is something for the rest of us to think about.” But this is very frustrating. There are a lot of really good policy ideas that are perpetually off the table. We can’t have anything that would upset the status quo. And so we are stuck with a government that represents the cutting edge of two centuries ago.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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