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Opinion: The Case For A 0% Corporate Income Tax

Summary

The corporate income tax has become impossible to collect.

It is making corporations do perverse things to lower their US tax liability.

It should be replaced by a VAT and carbon taxes.

Why not zero? www.ccPixs.com

Impossible to Collect

The corporate income tax has become impossible to collect. What do you think total corporate US income tax as a proportion of total US corporate profits was in 2017? This was before the tax cut, when the statutory rate was 35%. While you think about it, here’s some adorable kittens to look at:

Pixabay

In 2017 US corporations earned about $1.83 trillion, and paid $285 billion in US Federal income taxes for an effective rate of about 16%, not the 35% statutory rate you kept hearing about. That number is no doubt lower for 2018.

This is just silly. Here’s how it’s come down over time:

The statutory rate did not change in these year. That’s what an uncollectible tax looks like on a chart. Moreover, the effect has been uneven. Some companies do pay the statutory rate, while others use creative accounting methods to keep income outside the US and expenses inside.

I've had two major criticisms of the corporate side of the 2017 tax bill.

  • We’ve effectively borrowed $1.5 trillion from our children and grandchildren for one year of increased corporate profit growth, buybacks and dividends. I’ve run out of adjectives for this.
  • Focusing on corporate income taxes is silly, since no one pays them anyway.

The Caribbean Shuffle and the Double Irish Malt

Apple’s Irish HQ is in there somewhere. Joe Mabel

Accountants and tax lawyers are smart. They have much more time and resources to commit to the problem than the accountants and lawyers at the IRS, or the people who write tax legislation. They will always find a way around paying taxes, so long as a lot of money is at stake, and of course, it is

There are many ways for corporations to avoid paying US taxes. “The Caribbean Shuffle,” where a US entity “moves” to the Cayman Islands in name only, keeping everything but a mail drop in the US, has been popular for decades.

More popular recently is "The Irish Single Malt,” “The Double Irish,” and other variations, which are used extensively by large-cap US corporations. Being the most profitable company, Apple has the most to gain here. The Apple Irish “subsidiary” is home to five different Apple international divisions. Must be some huge spaceship-like building in the County Cork countryside, no?

No. It more resembles a mail drop with a few Irish accountants and lawyers whose job it is to see that, as much as is legal, all revenue and profits go to Ireland, and all expenses go to the US entity. Fortune paid a visit in 2013:

From the front, Apple HQ could well be mistaken for a high school, bland and modern, and just three stories high. And foot traffic is thin enough that when Fortune wandered up to the entrance on Tuesday morning, security guards quickly took notice. Was there anyone we could say hello to, we asked? No, the nearest public-relations staffer was in London.

To be fair, Apple has upsized the Irish HQ since then, but you would still never guess that behind the doors were a couple of hundreds of billions of dollars. Apple has about $20 billion of its massive cash pile in the US and most of the rest in Ireland. To be clear, this is an accounting fiction that has become fact because of the poor design of our corporate income tax laws.

Apple have to borrow billions of dollars (albeit at rates similar to the US Treasury) to return cash to shareholders. This makes no sense for anyone, except those few Irish accountants and lawyers.

So the current system is full of perverse incentives that make companies employ suboptimal tactics so they can reduce their tax bill and in the end, everyone loses — the corporations, the Treasury and the American people.

So Zero? Really?

What else makes sense? The thing to do is recognize that this type of tax has become impossible to collect, and is making corporations do perverse things. We should replace it with other taxes that are not difficult to collect, and also tax things we want less of at the same time.

VAT

Do you hate me now? Don’t hate me, or the VAT. The VAT is a great tax for a society like ours with a low savings rate and a large tax-avoidance sector. It is very easy to collect and difficult to avoid. We need a little less consumption and a little more savings.

The advantage of the VAT is that it would be simple to collect and would increase the savings rate, which would have many benefits for our economy, including narrowing the trade deficit and increasing foreign direct investment in the US, putting our capital flows in better shape too.

Carbon Tax

Climate change does not care whether you believe in it or not. It is coming for you and your kids and your grandkids. It’s happening right now, in real time.

Once upon a time, not too long ago, the US was a world leader. We played the tune and everyone waltzed the waltz. Our current President has turned this beautifully synchronized waltz into a mosh pit, but hopefully this is a passing phase. If there is one crucial global issue where US leadership is sorely lacking it is climate change. Since zeroing out the corporate rate would require replacing that revenue, such as it is, a carbon tax is an ideal component of that.

Tax the things you don’t want like carbon and excess consumption, not the things you do want, like corporate profits.

What About the Individual Side of the Tax Bill?

Don’t even get me started on that. Google “Kansas Experiment” if you want to know where that’s headed.

Conclusions

The focus on the statutory rate for corporate taxes is silly, since corporations have become expert at avoiding it, and haven’t paid the statutory rate in years. Furthermore, the tax code favors certain companies over others — some do pay the statutory rate, while others like Apple pay far less. It creates a series of perverse incentives that lead to a balance sheet like Apple’s where they have $245 billion in cash and $130 billion in debt. Everyone just accepts this, but it’s insane.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.