He proposes replacing the corporate income tax with having corporations give government shares of stock. He notes that this could be optional–corporations could choose to opt out of the corporate income tax by donating shares. However, one suspects that the cleaner approach would be to make it a requirement.
The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.
Pointer from Mark Thoma.
This approach would get rid of the distortions and rent-seeking of the corporate income tax. It would align the interests of government and corporations, in that costly regulations would cut into tax revenue. In that sense, it is a step in a libertarian direction. Because government would have partial ownership of businesses, it looks like socialism, but I think one can argue that the power to tax is equivalent to partial ownership, and that if anything the government uses its taxing powers in more meddlesome ways.
Dean Baker has some pretty good ideas. (I like his idea of allowing foreign heath-care facilities to set up in the USA allowed to bring in their own professional staff. )
I wonder what would it take to push most corporations to become partnerships?
It surprises me that more corporation do not opt to become partnerships to save the Corporate tax. What would it take for just the safest corporations to become partnerships?
Isn’t limited liability driving parterships to become corporations?
An owner does not have to do anything in order to receive dividends. Taxes are usually associated with services (regulation, public goods, security). The power to tax is more like a forced exchange with an external provider (not a coowner) of some services at a price determined by the provider.
Seems like it would lead to policy decisions that favor large corporations over small businesses. Not that that doesn’t happen already.
This was specifically the Blueseed seastead’s approach with regards to all startups onboard.
In so far as Blueseed would’ve been a government entity, its incentives would’ve been to maximize the aggregate value of the stock of those companies.
In the long run, this would just be a tax in other clothing, and it is utterly predictable that eventually the government would end up with controlling interest in every corporation domestically based. I think Baker is counting on the non-transferable nature of the shares, but politicians would then raise this “tax” in order to gain effective control of the businesses themselves to, for example, to raise the dividend, or hire a bunch of people just before an election.
What is to stop the government from running losses in its corporate portfolio and making it up elsewhere?
How could this possibly work for companies that have operations in multiple countries?
Sounds interesting – I’ll have a read. A fresh approach. A little bit like market socialism in some ways. Arnold is correct in that a govt that taxes the economy at say 30% in total is to all intents and purposes the owner of 30% of the assets in that economy.
One thing to check – dividends is fine and M&A is fine but with buybacks of course the firm is buying from voluntary sellers, and then retiring the stock – with this system does the govt. have to participate or can they choose not to.
Government already has the equivalent of non-voting equity positions in individual income. Also, if consider property tax as a share of imputed rent, then government has a non-voting equity position (approx 20%?) on all real estate too.
Would a government with corporate shares tend to work as a ‘fascist’ conspiracy against the consumer and provide a solution to the cartel coordination problem so as to generate taxes from ‘monopoly surplus profits’ from a supple restricted below the competitive equilibrium?
If someway could be found to restrict the government’s ability to control the corporation as a shareholder, it might work.
We already have “government-guided enterprise” as related in this description of the situation in 1950. De-regulation cut back a bit, but since the 1980s, the government’s intervention has only grown.
“Is the big and successful corporation its own master, then? Not quite.
“To begin with, it is severely circumscribed by the government. as Professor Sumner H. Slichter has said, one of the basic changes which have taken place in America during the last fifty years [1900-1950] is “the transformation of the economy form one of free enterprise to one of government guided enterprise….The new economy,” says Dr. Slichter, “operates on the principle that fundamental decisions on who has what incomes, what is produced, and at what prices it s sold are determined by public policies.” The government interferes with the course of prices by putting a floor under some, a ceiling over others; it regulates in numerous ways how goods may be advertised and sold, what businesses a corporation may be allowed to buy into, and how employees may be paid; in some states with Fair Employment laws it even has a say about who may be hired. “When a piece of business comes up,’ writes Ed Tyng, “the first question is not likely to be ‘Should we do it?’ but ‘Can we do it, under existing rules and regulations?’ “He is writing about banking, but what he says hold good for many another business. Furthermore, in the collection of corporate income taxes, withholding taxes, social security taxes, and other levies the government imposes upon the corporation an intricate series of bookkeeping tasks which in some cases may be as onerous as those it must undertake on its own behalf. Thus the choices of enterprise are both hedged in and complicated by government. ”
–‘The Big Change: America Transforms Itself 1900-1950’ (1952), Frederick Allen Lewis
“I wonder what would it take to push most corporations to become partnerships?”
The requirement for unaninous governance decisions is pretty limiting.
http://definitions.uslegal.com/p/partnerships/
General Partnerships In this standard form of partnership, all of the partners are equally responsible for the business’s debts and liabilities. In addition, all partners are allowed to be involved in the management of the company. In fact, in the absence of a statement to the contrary in the partnership agreement, each partner has equal rights to control and manage the business. Therefore, unanimous consent of the partners is required for all major actions undertaken.
If corporations make moves to reduce tax liability now, why would they not also change their capital structure to reduce dividends paid to common stock held by government in favor of other financial instruments (debt, preferred stock, new financial securities, employee profit sharing plans, etc.)
The basic problem remains the same: investors and employees must be convinced to contribute financial and human capital to the firm in exchange for claims on future firm cash flows. (I would count wages among such claims, by the way.) Government is not necessary to produce those cash flows, but human and financial capital are. Thus, firms will always seek to structure securities, operations, etc. to make themselves as attractive as possible to investors and employees at the expense of government. (There is no corresponding need for the firm to make itself attractive to government.) Corporate tax minimization is just a special case.
Human and financial capital will always flow to the most attractive destination, taking taxes into account. That’s why firms seek to minimize taxes, whether they are in the form of the corporate taxes as we currently know them or whether they are in the form of common stock dividends. Although nominally the stock holders own the firm, firm management, employees, and investors (who can own instruments besides common stock) will all have an incentive to exclude government from firm cash flows because, again, they all know that government is not needed to generate those cash flows.
I can already imagine a few ways companies will change behavior to avoid paying the share tax.
Baker says non-voting shares that must be bought off if the company goes for an inversion.
How is this different from a 17%-35% tax on dividends, buybacks and inversions? It’s just a tax masquerading as “non voting shares.” And I dont see why it’s a particularly good tax.
I had posted Baker’s interesting proposal, and a rather mundane mechanical detail that wasn’t addressed by Baker came up in the comments. If the govt is holding stock, what about the govt cash flow? How does the lack of ready cash impact the plan on the govt side?
Baker’s description of inversions was so wrong that it is clear he doesn’t understand how federal income taxation of corporations works, and, based on that, I’m assuming he doesn’t understand GAAP accounting either, which all suggests this idea is poorly thought through. The most glaring problem is that the issuance of shares in lieu of cash is generally an accounting expense, even if not a cash expense, and so the earnings hit from the taxes will be on the financials in any case, and most publicly-traded corporations care far more about taxes as reported on their financials than actual cash outlays. Given equity financing is generally the most expensive financing there is, (a) it’s not clear why any company that isn’t borderline bankrupt would ever opt to pay taxes with equity and (b) even if forced to pay taxes with equity, companies will remain just as motivated, if not more so, to minimize their tax burdens.