Rationality — and trillions — will return if the corporate tax rate drops from 35 to 20 percent.
Like Franz Anton Mesmer and Dragon Fruit Mad Dog 20/20, our tax code encourages bizarre behavior.
Apple, an American company, holds 97 percent of its cash in countries not named the United States of America. Employers hire accountants and lawyers, and not workers, to ensure profits. Corporations insist that they operate as something other than corporations. Sure, limited liability companies (LLCs) differ from traditional companies in that “members,” not shareholders, “organize” — but do not incorporate — under “operating agreements” and not bylaws. Alas, the differences get lost on all but the tax man.
Businesses did not come up with Subchapter-S Corporations. Congress did in the 1950s. More recently, in the late 1970s, Wyoming, which also gave the world the hydraulic gallows, invented LLCs (an innovation that apparently caught on more broadly). Products of our particular time and place, the tax-code-created entities do not appear essential to, or even existent in, other eras and locales.
If Pan Am, E.F. Hutton, and Woolworth’s can go out of business without everyone wetting their pants and falling down manholes, then the country might just survive the demise of LLCs and Subchapter-S Corporations. Indeed, the country, and its coffers, will thrive without them.
American business needs lower rates and the American treasury needs fewer ways to evade them. An across-the-board corporate tax cut from 35 percent to 20 percent, one that also abolishes double taxation, protected foreign havens, and strange creations of the tax code, benefits moneymakers and tax takers.
Why stop at slashing rates? Why not take an ax to the whole tax code?
Reducing the number of personal income brackets from seven to five, as the president proposes, moves us in the right direction — but not fast enough. More so than subtracting two individual rates, imposing one solitary business tax rate serves as the best means to simplify the tax code. This means fewer labyrinths to navigate, accountants, lobbyists, and lawyers to hire, and, yes — for most — taxes to pay.
A uniform 20 percent rate would abolish double taxation and with it legal constructs such as LLCs and Subchapter-S Corporations rendered unnecessary with a consistent tax rate. Since employees can own shares of C-Corporations, but not (at least without great difficulty) LLCs, this fosters an opportunity society in which workers become owners — and businesses naturally become more productive.
A uniform 20 percent rate disincentivizes the exportation of profits overseas. Instead of encouraging Microsoft to shelter more than 90 percent of its cash abroad, as it does now, a uniform rate of 20 percent would catalyze a repatriation of profits by ensuring that whether an American company keeps cash here or sends it there, it gets taxed no matter what at a 20 percent rate. For profits kept in foreign countries, Uncle Sam would just impose a tax atop the local rate to equal a total of 20 percent. With the proposed U.S. corporate rate slightly below the global average, and the taxman ensuring that surplus money abroad pays the domestic rate, most of the $2.5 trillion currently on a long, long vacation finally comes home — and gets to work for America.
A flat corporate rate of 20 percent, with neither double taxation nor loopholes enabling the sheltering of profits, is a big idea with big ramifications. It makes a convoluted code clear, repatriates profits, transforms workers into owners, and generates more revenues through a lower rate strictly applied.
A tough-to-understand tax code, like fortified wine and formidable hypnotists, unleashes tough-to-understand behavior in those under its sway. Those preferring rational corporate actors should insist on a rational corporate tax code.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.