When 20 percent of profitable large corporations based in the United States paid absolutely nothing (that is, zero dollars) in income tax during fiscal year 2012—as a report released in 2016 showed—it’s fair to say something is broken in the tax system. But proposed fixes so far have tended to be incremental tweaks: tinkering with percentages, futzing with what items a corporation can deduct, etc., when what’s needed is a massive upheaval of the status quo.
How about we just stop charging corporations income taxes at all? What if, instead, the government were to seize a portion of their corporate stock?
This proposal is being set forth by Dean Baker, the co-director of the Center for Economic and Policy Research, in a series of pieces—first in the New York Times, then in the Los Angeles Times. What Baker is talking about isn’t a wholesale takeover of companies by the government, but rather a portion; Baker offers a suggestion somewhere between 17 and 35 percent, saying “we can fight over the [exact] percentage later.” And the idea makes all sorts of sense.
For starters, such a move would cease the constant loophole-seeking/loophole-closing war between government and businesses. With a plan like Baker’s, when the business makes money (the one thing it is geared to do), so does the government, simple as that. And if businesses try to fudge or obscure those numbers, they’d also be obscuring them from other shareholders in the company, which is, well, a very illegal thing to do. (Unlike the current system, which rewards the exploitation of technically legal loopholes.)
As Baker puts it: “This system would eliminate almost all opportunities for gaming, since a company would not be able to deny the government its share of profits.”
This plan would also benefit corporations. Currently, every business is forced to spend a portion of its budget on accounting and lawyers, who make sure the company is taking advantage of every loophole available. Such companies are spending a lot of money in the hopes of saving even more. But with the stock seizure, businesses could instead invest that money in innovation, growing their customer base, or accruing benefits for its workforce.
It only makes sense to have business and governments work together, rather than seeing them as two sides constantly jockeying for hidden advantages.
Workers will benefit from this plan too, even if the corporation doesn’t re-invest directly back into its workforce, especially if the government uses the new influx of money from its corporate shares to subsidize universal health care, improved transportation and infrastructure, and unemployment benefits for when workers are between jobs.
While plenty of people might dismiss such a plan as (gasp!) socialism, under the stipulations presented by Baker—whereby corporations hand over a portion of their shares—it’s really not. The government would be allocated non-voting shares, meaning the feds would benefit from a company’s success without having any say in what the company does, which is very much not socialism. If anything, it’s a course correction, badly needed in today’s era when corporate leadership is taking home the most-lopsided payouts ever.
But that’s not to say this plan is without potential pitfalls.
“[The plan] has one big problem,” writes Gabriel Zucman, a French economist and author of The Hidden Wealth of Nations: The Scourge of Tax Havens, in an email. “It gives incentives to firms to move completely out of the United States, so to avoid being 25 percent owned by the U.S. government.” The only way to prevent this corporate exodus, Zucman writes, is to require any foreign corporation selling in the U.S. to also transfer a portion of their shares to the U.S. government.
“This is extreme, and will not happen,” Zucman writes. “Corporations would prefer to cut ties with the U.S. entirely.”
“If other countries played along and had a cooperative arrangement, of course [this would work]. But it’s not in their interest to do that,” says Alan Auerbach, professor of economics and law at the University of California–Berkeley. “If you’re General Electric and subject to this tax, you’ll be unhappy because Siemens, a German company, isn’t. One big problem with [Baker’s] approach is that it only applies to U.S. companies. So, companies will want to stop being U.S. companies.”
Instead, Auerbach favors the idea of the destination-based cash-flow tax; earlier this year, he made his case for it in the New York Times. Whereas the current system taxes profits (that is, revenue minus costs) based on where the company is headquartered, Auerbach’s proposal would focus on where the company’s product is consumed.
Currently, destination-based cash flow is at the core of the GOP’s tax reform proposal, albeit with plenty of debate over how imports are distinguished from exports, what exemptions will be approved, how the problem of exchange rates are dealt with, and on and on. There’s plenty of good in the ideas (for instance, this method should cease the usage of tax shelters by multinationals), but all the heavily complex arrangements (it necessitates the addition of a border-adjustment tax on imports to account for the end of export taxes) just mean different loopholes to be exploited, which is sort of the problem with any of these numbers-tinkering ideas.
So, while Baker’s proposal might not be perfect in its current formulation, the idea still offers the best path forward. It only makes sense to have business and governments work together, rather than seeing them as two sides constantly jockeying for hidden advantages.
