Martin Lobel is a partner at Lobel Novins & Lamont LLP and the chair of Tax Analysts' board of directors.
[Lobel argues for a return to a genuinely conservative position in which the market picks the winners in business; the elimination of all business tax subsidies; and an economic structure that allocates capital efficiently, instead of one that lets the wealthy and powerful influence policies that are destructive to middle-income Americans.]
The power of the multinational corporations operating below the notice of the mainstream media has been clarified by two recent proposals:
1. While President Obama's proposal to tax the income that multinational corporations claim they earned offshore at a lower rate than domestic income is better than the Republican proposal to exempt all of that income from taxes, it would still leave domestic corporations at a competitive disadvantage. It would also lower, but not eliminate, the incentive those multinationals have to shift jobs and profits offshore.
2. The OECD, which has been trying to draft proposals to prevent multinationals from shifting income to avoid taxes, released a proposal for country-by-country reporting so that every country could see what the multinationals were telling other countries where they earned profits. Unfortunately, it slipped in a provision that no country that received the data could use formulary apportionment, which is the most effective way to allocate the multinationals' income between countries in which they operate. Formulary apportionment, along with combined reporting (also known as unitary accounting), has been used successfully by the states for over 100 years, and the Supreme Court in Barclays1 approved it for use in the international sphere. This provision was presumably inserted to placate the Treasury Department (and multinationals), which is still trying to force the use of transfer pricing to allocate profits, even though every IRS commissioner has testified that the IRS cannot effectively police transfer pricing.
Once again, the very rich and powerful are persuading politicians to support policies that are destructive to middle-income Americans. Even Senate Finance Committee Chair Orrin G. Hatch, R-Utah, who is personally one of the most decent guys in the Senate, is pushing a territorial tax that would totally exempt from U.S. taxation profits that multinationals claim they earned offshore while continuing to fully tax domestic companies. Do corporations really need more incentives to export jobs and investments? Isn't this a classic example of a job-destroying tax? Is it any wonder that middle-income households have continued to lose economic ground while almost all of the increase in GDP has gone to the top 1 percent, most of which went to the top 0.01 percent? Yet, the very rich and their minions claim that the poor are "leeching" off the system created by "big government" to justify cutting their own taxes and to eviscerate our government -- even though all the evidence shows that cutting taxes for the rich doesn't help the economy, let alone middle-income earners.
We would all like to be rich, but the truth is that mobility from the bottom to the top of the economic ladder has diminished dramatically over the past 30 years. We need to return to a genuinely conservative position: Let the market, not government, pick who the winners and losers are in business. We need to figure out what functions government should perform and then fund them with the most efficient taxes. Cutting taxes before figuring out what role government should play is counterproductive. Rather than trying to cut taxes or increase tax subsidies to the wealthy to get our economy moving again, we should eliminate all business tax subsidies. Those tax expenditures, also known as subsidies or loopholes, cost American taxpayers more than our total budgeted expenditures. As Lee A. Sheppard put it, "The corporate income tax is a bundle of subsidies with a tax attached."2 Besides, government is not as good as the free market in picking winners and losers, in part because government-picked winners are usually those who can afford the most effective lobbyists -- that is, the plutocrats who fund most political campaigns.
We need to refocus our economic structure so that it works to allocate capital efficiently rather than encouraging the big banks and Wall Street to spend so much of their time devising financial instruments supported by implicit government guarantees, whose primary function is to generate huge fees. We need to reintroduce moral hazard to Wall Street so that decision-makers are personally responsible for the consequences, something neither the Bush nor Obama administrations have been willing to do. 60 Minutes recently exposed HSBC Holdings PLC, one of the world's largest banks, and its consistent pattern of helping crooks hide their ill-gotten gains.
The Treasury Department had the same data in 2010 but settled its claims against HSBC without ever charging any individual. Too big to fail? While the Dodd-Frank bill was too complex (mostly because of lobbyists), it was a step in the right direction, assuming its provisions are enforced. However, Wall Street is now nibbling away at the law by sneaking provisions into "must pass" bills -- like those that allow banks to gamble on derivatives using taxpayer-guaranteed money -- or by weakening it during the drafting of complex regulations of which the public is unaware.
When are the so-called conservative spokesmen going to sound like conservatives, rather than mouthpieces for the plutocrats? Don't hold your breath. Money talks. But what remains of an independent media has an obligation to inform the voters, who have the ultimate responsibility to protect their own interests. Unfortunately, recent events don't give one a lot of confidence that they will do so.
1 Barclays Bank PLC v. Franchise Tax Board & Colgate-Palmolive Co. v. Franchise Tax Board, 512 U.S. 298 (1994) 94 TNT 119-9: Court Opinions (CTS).
2 Sheppard, "Taxation as Monetary Policy," Tax Notes Int'l, Oct. 20, 2014, p. 195 .