The main gripe against the 35 percent federal corporate tax rate involves its massive size: just two nations inflict higher rates on businesses than the capital of capitalism does.
But a bigger problem than even its bigness involves its deceptiveness. Thirty-five percent on paper rarely equals 35 percent in paper.
Some companies, organized as C-Corporations, pay taxes twice on the same money — once on profits and once again on dividends. Still, other companies avoid paying taxes altogether by hiding cash overseas.
The tax rate for corporations isn’t 35 percent. It’s whatever the company can get away with paying, or, alternatively, whatever the government can get away with taking.
The 20 percent corporate rate proposed by the president sets America on a more competitive footing vis-à-vis the rest of the world. But it lacks any surrounding structure that ensures that 20 percent means 20 percent and not 2 percent or 30 percent or 12 percent.
The first step to honesty in the corporate tax system involves imposing the federal tax on all American companies regardless of where they hold their money. Currently, we perversely penalize corporations that keep their cash in the United States and reward, through Uncle Sam looking the other way, corporations that squirrel away their money abroad. That hurts the American economy, the federal treasury, and the corporate actors who do not bend the rules.
Congress needs to act to make the location of cash irrelevant for tax purposes. This means imposing a uniform 20 percent tax on corporations. If an American business pays 10 percent for sheltering money in Ireland, the IRS should add a 10 percent tax to that to equal the 20 percent rate paid by that American company’s peers. This repatriates money, levels the playing field, and replenishes the treasury.
It also makes it irrational for an American company to establish shells and subsidiaries in the Bahamas, Singapore, and points beyond for tax purposes when the IRS holds them responsible for a 20 percent tax no matter where they keep their cash. So, not only does the $464 billion held abroad by Apple, Microsoft, and Google return to its country of origin, but Apple, Microsoft, and Google likely continue to keep their money here lest a legitimate business reason coax that money elsewhere.
The second step involves the abolition of double taxation, the existence of which brought into existence such legal constructs as the limited liability company and the Subchapter-S Corporation. This involves combining the best of LLCs (a single level of taxation) with the best of traditional C-Corporations (the ability to make workers, or anyone, shareholders) to institute a single rate upon corporate profits that allows for stockholders. This negates the whole raison d’être of LLCs and makes standard corporations more, at least in one important sense, like them.
The third step requires the certainty of death and taxes to cease playing as a double act upon the cessation of the final act. Already, the estate tax excludes more than 99 percent of the public. The president calls for its abolition — 99.4 percent eliminated apparently does not mean abolished. To the extent that it survives this round of tax reform, the estate tax should do so only as a mechanism that taxes unrealized gains, such as unsold stock or a property, upon death and does not tax anything already taxed in the decedent’s life.
The corporate tax code displays a profound dishonesty that calls the same entities different names and uses numbers that through loopholes and other legerdemain equal some other numbers but not themselves. Cutting rates to make America more competitive with the rest of the world matters. So, too, does clarity, simplicity, and veracity.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.