Defeating Corporate Tax Dodging

Since the last time the US federal tax code was overhauled, in 1986, countries around the world have lowered their tax rates, leaving the United States with the highest corporate tax rate in the developed world.

Eager to minimize the impact of of taxation as a business expense, corporations and their lobbyists have packed the US tax laws with inefficiencies and special-interest loopholes.

Some very large US corporations use so many quite legal tax dodges tht they end up hardly paying any tax at all.

Alternative Minimum Tax

If there is to be any chance of holding down the ever-increasing national debt, there has to be a way to hold down tax dodging by rich corporations.

One way is the Alternative Minimum Tax (AMT). This is imposed on both individuals and corporations thought to have been abusing tax loopholes. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (also known as exemption). This exemption is substantially higher than the exemption from regular income tax.

The AMT is difficult to dodge. Unfortunately, thanks to inflation, the AMT is now increasing tax on more and more middle income people -- who don’t have big tax shelters.

Inverted Corporations

I’ve been reading about corporate tax inversions – avoiding high US taxes by getting acquired by a foreign corporation, even though the company’s main operations remain in the US.

Things That Can Be Done

What can be done to hold down corporate tax dodging? Legislation to close tax loopholes would help, but lobbyists have been very effective in preventing this.

We need a better, simpler way to compel corporations to pay more tax. It is not good for companies to expend so much effort on dodging taxes rather than producing goods and services. We need to make the U.S. economy more competitive and to accelerate economic growth and job creation. We should ensure that capital and talent are allocated more in pursuit of high economic returns, rather than low tax bills.

Balance Expense with Income

A fairly direct way to prevent deficits is to assign every expense to a revenue source. New expenses can’t be passed unless a tax revenue source is identified to cover it. If there isn’t enough revenue in the source (tax) to cover the expenses assigned to it, then either the tax must be increased, or the expenses cut (or both). This fixes the only real cause of government deficits – appropriating expenses without covering them with an income source.

Of course tightly connecting expenses to income, which all responsible individuals and households do, is not popular among politicians, who tend not to be fiscally responsible.

I wrote a humorous speculative story about what would happen if such a scheme were actually passed.

New Idea: TRS

A scheme like matching expense with income could deal with corporate tax dodging. The government decides how much revenue it requires from the corporate tax base. It then divides this required revenue into many equal-sized units called “Tax Responsibility Shares” (TRS).

When a corporation is created to operate in the US, it agrees to cover a certain number of TRS units.

Paying corporate taxes becomes simple. There are no deductions or exclusions; there is no sheltered offshore income. Each corporation gets a tax bill for the number of shares of Tax Responsibility Shares it agreed to cover. The TRS total produces the desired corporate revenue.

Corporations which cannot cover all their TRS units must arrange with other corporations to cover that shortfall, or go out of business. The other corporations might get shares in the shortfall corporation, or some other compensation. No corporation is allowed to default, unless they are prepared to declare bankruptcy. In extreme cases, a corporation with a TRS shortfall could be absorbed in a hostile takeover. This threat could provide strong motivation for a corporation to be sure that it has signed up for enough TRS.

If not enough TRS has been subscribed to cover the corporate tax base, the number of TRS units is increased for each corporation, proportionately, or according to some other rule. The total tax requirement must be covered.

There needs to be some agreed connection between the amount (kind?) of business done by a corporation and its number of TRS. It might be total employees, total cash, equipment or buildings.

Having a minimum level of TRS should be the requirement for engaging in certain types of business activities. There might be limits on the number of employees, or the number of regional offices.

A "green" possibility is connecting tax responsibility to the amount of pollution or carbon generated by the corporation.

The bottom line is that payment of TRS has to generate the entire required corporate tax revenue.

No more tax dodging.