A Progressive Way to End Corporate Inversions

BOSTON - APRIL 30: A new upscale Walgreens will open in Downtown Crossing tomorrow on Wednesday, May 1, 2013. (Photo by Wendy
BOSTON - APRIL 30: A new upscale Walgreens will open in Downtown Crossing tomorrow on Wednesday, May 1, 2013. (Photo by Wendy Maeda/The Boston Globe via Getty Images)

We are justly outraged by efforts of large corporations such as Chiquita or Eaton to avoid taxes by renouncing their U.S. "citizenship" or other legal shenanigans. But, the president's efforts to fix would just make the tax code more complex. It would be better to scrap corporate taxes altogether. To offset the impact of dispensing with corporate taxes, we should make changes to individual taxes that would also make them simpler and fairer. This might appear to be surrender to the corporations but it is merely a tactical change to achieve the same goal in a better way. The result would be taxes that are simpler, fairer and more progressive.

Corporate taxation has many problems. Inversions are just the latest loophole. Not only are corporate taxes encouraging companies to move offshore, they also lead many US corporations to keep trillions of dollars outside the US, rather than investing it here. Obama is considering addressing these problems by modifying the tax code. But that would further complicate it. And, it is a difficult task, perhaps impossible, to do so in a way that is not prone to further evasion.

But, the more compelling reason to scrap corporate taxes is that even if we could apply corporate taxes perfectly, the burden would not fall as intended. We are making the same mistake the Supreme Court has, conflating corporations with their owners. When corporations like Eaton move out of the US, they obtain an unfair advantage over their competitors who remain in the US. So, the current situation perversely rewards companies for renouncing their "citizenship" -- exactly the opposite of what we would want to do. But, if we could apply taxes evenly across all companies, most of the tax is likely paid by Eaton's customers or employees. The reason is that the taxes would then be a cost of doing business. Just as airlines largely pass on a rise in the cost of jet fuel into ticket prices, corporations would adjust prices and wages to compensate for much of the taxes. When we think of wanting corporations to pay their "fair share" of taxes, we aren't thinking of their customers or workers, but their shareholders. If the goal is to assure that the owners of companies pay their fair share of taxes, we can achieve that more surely if we tax them directly.

And, if we scrap corporate taxes, we will need to offset the revenue. The obvious way to do so is to raise taxes on capital in the individual income tax -- changes that should be made in any event. We currently tax dividends and capital gains at about half the rate of "ordinary" income. Many advocates justify the preferential treatment of capital gains and dividends with the argument that we already tax corporations. Well, since we are getting rid of corporate taxes we should get rid of the preference for capital, too. There is a detailed proposal along these lines by economists Eric Toder and Alan Viard.

These preferences shouldn't exist in any case. It wasn't that long ago, under the Republican Nixon administration, that "earned" income -- such as wages -- were taxed at lower rates than "unearned" investment income. That made more sense and was fairer than our current structure. Taxing capital at least equally to labor would also help offset the growing wealth inequality in this country. Instituting a wealth tax and closing some loopholes in the estate tax system would be helpful as well.

These changes would have salutary side effects, too. Many subsidies and loopholes have been written into the corporate tax code. There are provisions that encourage oil exploration and others that favor renewable energy. The result is a complex maze that mostly benefits lobbyists, tax lawyers and their clients. Eliminating corporate taxes would also eliminate these loopholes. If we want to subsidize some of these activities, we should do so more directly and openly. But, in practice most of the tax preferences would not stand up to public scrutiny and would not be re-enacted.

This will also save corporations a large amount of money spent on accountants and tax lawyers. Again, this will not be a boon to shareholders as those costs are likely largely passed on to customers. And, it will save the government money it currently spends trying, in vain, to enforce corporate tax rules. These are benefits to society unless you consider high-priced lawyers working to avoid taxes to be contributing to the general welfare.

Raising the capital gains rate will eliminate the "carried interest" tax gimmick that allows billionaire hedge fund managers to have their earnings taxed at lower rates than Warren Buffett's long-suffering secretary as well as other inequities currently in the tax code.

The preferential treatment of capital gains and dividend income is a huge benefit to the 0.1%. On the other hand, the burden of corporate taxes is likely borne more widely. The current system penalizes smaller "patriotic" companies and benefits large multinationals. Instead of trying to fix the corporate tax code, we are better off eliminating it. This would end the problem with corporate inversions and impose taxes on those we intend to tax. Over all, taxes would be more economically efficient, simpler, more progressive and fairer.