July 16, 2014

DON'T TAX WHAT YOU DO WANT:

We Don't Need a Corporate Income Tax (Megan McArdle, 7/16/14, Bloomberg View)

[W]hat if we made our tax system so attractive to corporations that they would have no interest in moving themselves abroad?

The problem with this extended chess game is that every move is very costly. First, it adds to the complexity of the tax code. With every new rule -- no matter how earnestly said rule attempts to close a "loophole" -- it becomes harder to know whether you are in compliance with the law. This is true on both sides; corporate tax law has now passed well beyond the point where it is possible for a single expert to be familiar with its ins and outs. This makes it harder to plan business expansions, harder to forecast government revenue, and it requires both sides to hire more experts in order to determine whether corporations are compliant. It also means more lawsuits, and longer ones, as both sides wrangle over how this morass of laws should be applied to real-world situations.

You can think of it this way: Every new law has possible intersections with every other tax law in existence. As the number of laws grows, the number of possible intersections grows even faster. And each of those intersections represents both a possible way to avoid taxes and a potential for unintended consequences that inadvertently outlaw something Congress never intended to touch. This growing complexity makes it more and more difficult for either companies or lawmakers to forecast the ultimate effects of new tax laws. That's bad. It's also expensive.

Then there's the immense amount of time, money and human talent wasted structuring business activity to minimize tax bills -- up to, and including, moving your headquarters to another country. This is a total loss to the economy: All the resources used to structure those transactions could instead have been employed doing something useful, or at least not actively harmful. [...]

All of which is to say that there is no such thing as a fair, simple corporate tax code that can't be gamed. And the harder we try to squeeze them for each extra dime, the harder -- and more expensively -- they will resist. So here's my proposal: Let's not try. Let's eliminate the corporate income tax, or at least lower the rate so far that they won't spend so much time and energy trying to avoid it.
Posted by at July 16, 2014 5:46 PM
  
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