NYT: Inverting the Debate Over Corporate Inversions

[Scuba]

http://www.nytimes.com/2014/08/07/upshot/inverting-the-debate-over-corporate-inversions.html?_r=0

You might think we could fix that problem by taxing all companies only on their domestic activities, in effect letting every firm invert. Some Republicans advocate this policy, known as “territorial taxation,” but it would create its own set of problems. I wrote about this back in April: “If Apple develops the iPhone in California, has a subcontractor manufacture it in China out of parts made in Korea and elsewhere, and then sells it in Europe through a unit in Ireland, how do we decide how much of the profit from sales should be booked where?”

...

There is a third option, which I also wrote about in April: abolishing the corporate income tax and increasing the tax burden on shareholders. The economists Alan Viard and Eric Toder have a plan to do this; they would offset repeal of the corporate tax by taxing dividends and capital gains at the same rate as ordinary income, and by taxing those gains every year, not just when the stock is sold.

The big disadvantage of the Viard-Toder plan is that it would lose revenue. Their added taxes would collect only about half as much revenue as would be lost by abolishing the corporate income tax. But that problem could be fixed by raising income tax rates on the same groups that would benefit from abolition of the corporate income tax. Mostly, that’s two groups: rich people, who own most of the personal financial assets in the United States; and nonprofit institutions like universities and pension funds, which would get a windfall from corporate tax repeal in the form of higher returns on their investments.

The Viard-Toder plan has a number of advantages; for example, it would end the tax incentives that encourage corporations to finance themselves with debt instead of equity. Another big plus is that it would make inversion pointless. As long as a firm has American shareholders, the American government would collect tax on income from that firm. The government wouldn’t have to figure out how much of Procter & Gamble’s profit comes from selling detergent in France, and it wouldn’t have to care where companies like Walgreen are incorporated.

Interesting stuff. Hope some tax policy wonks will weigh in.

[unblock]

1. interesting, but i'm wary. as a practical matter,

this gives corporations a big incentive to suspend dividends and grow tax-free.

first, this greatly increases corporate power at a time when the opposite is needed.

second, after corporations have amassed massive cash, it sets the stage for a republican congress to whine about how all that trapped cash isn't helping the economy in order to rationalize a massive dividend tax cut, thereby undoing whatever good was intended to come out of this plan.


i do like the idea of taxing dividends the same as ordinary income, and also taxing capital gains each year, though that would encourage people to invest (aka hide their money) in less liquid things that can't be priced so easily, such as art.

but i think the corporate tax at some level, in some form, needs to stay. perhaps these other measures would allow the corporate tax to be reduced to something corporations wouldn't fight and something i could live with if rich people are appropriately taxed in other ways.