April 14, 2014
Caterpillar is the latest company to be grandly chastised by recognizing profits in offshore companies rather than to recognize them in the United States, thereby reducing its income tax burden. (Let’s ignore the fact that management owes a duty to shareholders to maximize net profit and therefore implicitly to minimize its tax burden.) Even if you are in favor of free markets and against excessive taxation, this may nonetheless rub you the wrong way. Alas, unintended consequences are inseparable from any large government undertaking such as administering an income tax.
But wouldn’t it be more simple and fair if corporations paid a tax calculated on top-line revenue rather than net profit? No deductions, no depreciation schedules, no loopholes, no political favors; and therefore, no preparation of enormous corporate tax returns. Imagine the savings in effort and expense that is currently spent in “managing down” corporate tax liabilities.
To estimate the amount of revenue to be raised by this method, let’s use a corporate revenue tax of 2% to be levied on all companies, regardless of size of other characteristics. We can’t arrive at our annual tax revenue by simply multiplying this 2.0% by annual GDP, which is currently approximately $17 trillion (https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm), because GDP only captures “final goods”. If we adjust to include “intermediate goods” of approximately $17 trillion that go into creating final goods, this yields “gross output” of, say, $34 trillion. (This intermediate goods figure is from Forbes magazine here: http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/)
Thus, our 2% revenue tax on the economy’s gross revenue yields tax revenue to Uncle Sam of approximately $680 billion. This compares to FY2013 corporate income tax revenue of $274 billion. (http://en.wikipedia.org/wiki/United_States_federal_budget) If this is too much revenue from corporations, then we can make the tax rate 1% instead of 2% or something in between.
The change to a revenue tax should be accomplished with an amendment to the constitution, as should a permanent change in personal income tax calculations and spending and borrowing limits on the federal government. It should be clear to everyone by now that politicians cannot be trusted with a budget. An iron clad method for taxing, spending, and borrowing must be implemented to avoid future economic disasters. (Of course, we should not expect anything to save us from our current inevitable fate of a total financial wipeout and the de facto bankruptcy of our current government. Alas, these are forgone conclusions.)
As for revenues generated overseas, let corporations pay no revenue tax on those amounts. Those are monies made by selling things to foreigners; why not encourage this behavior? For items sold in the U.S. by offshore subsidiaries of domestic corporations, they must pay the revenue tax, as should foreign companies that import to the U.S.—unless they are currently paying an import tariff greater than this revenue tax.
As for tracking this information, we have the benefit of computers (and, no, not the same programmers who devised the Obamacare system). The IRS already requires that most companies report electronically on 1099 forms the amount of goods they sell to customers. And then financial statements can be prepared for investors and lenders to companies rather than for Uncle Sam.
While entirely eliminating any corporate tax, income or otherwise, might be the best free-market solution, this is politically impossible given today’s wealth envy. Dangling a doubling in government revenue that can be obtained by taxing “greedy corporate pigs” might even allow Occupiers to support such a proposal. And eliminating loopholes and favoritism will eliminate the corporate welfare that results from the current Byzantine tax policy.
Free Market Underdog 