Over the past fifty years the
portion of the federal tax revenue paid by corporations has decreased
dramatically. It is now almost irrelevant. Nevertheless corporations
spend a great deal of time and money on finding ways to lower their tax
liability even further.
This has several undesirable results. The cost of doing business is
raised. In a typical arrangement a large corporation hires a tax
consulting firm to create a way to lower their taxes. In return the
consultant gets a portion of the savings as a fee. The government loses
the revenue, the corporation wastes the money on the fee and the clever
people at the consulting company are misused in socially unproductive
work. In addition as was described in this folly it has a corrosive effect
on the ethical behavior of congress.
A similar effect happens at the state and local level. Corporations
play one area against another when looking to setup or expand a
business in a particular locale. Governments are blackmailed into
offering tax concessions to "attract" new business. As a consequence
the cost of the additional services supplied by the locale are shifted
to individuals or other businesses in the region that are not as adept
at playing the tax game.
In addition the imbalance in tax policy puts some companies at a
disadvantage with other. The migration of shell corporations to off
shore tax havens puts more ethical or patriotic companies at a
What is needed is a way to remove the financial incentives to "creative
accounting". The simplest is to eliminate the corporate tax on
This should be replaced by an alternative source of corporate revenue.
There are many proposals floating around. The one that has been adopted
most frequently elsewhere in the world is a value added tax (VAT). This
is applied at each step of the production stage as a percentage of the
"value" added by the company in processing it's product. So if I buy
leather for $1 and make a pair of shoes that I wholesale for $5 the
value added is $4 (ignoring labor and other costs, to simplify the
example). Ranges of the tax are generally in the 10-20% range. So a 10%
tax would collect $0.40 in the prior example.
Another approach might be a gross receipts tax based upon how much
revenue a company takes in. This might make calculations easier in the
case of service industries where the "value added" is less clear than
Whatever approach is used it should have a simple underlying principal.
Every company pays the tax and the rate is the same for all. There must
be no special cases or exceptions or the tax avoidance industry will
once again spring up as a socially unproductive parasite.
Ethical corporations should approve of this approach since it levels
the playing field and makes for more fair competition. Whether
corporations that have become expert at gaming the system agree is
another matter. And the extortion game used by congress to finance
their campaigns needs to be fixed or they will refuse to consider
jeopardizing their own revenue streams.
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Copyright © 2004 Robert D Feinman
Feel free to use the ideas, but the words are mine.