Wednesday, July 16, 2014

Click here to read this post by Megan McArdle.
"corporate tax law has now passed well beyond the point where it is possible for a single expert to be familiar with its ins and outs. This makes it harder to plan business expansions, harder to forecast government revenue, and it requires both sides to hire more experts in order to determine whether corporations are compliant. It also means more lawsuits, and longer ones, as both sides wrangle over how this morass of laws should be applied to real-world situations.

You can think of it this way: Every new law has possible intersections with every other tax law in existence. As the number of laws grows, the number of possible intersections grows even faster. And each of those intersections represents both a possible way to avoid taxes and a potential for unintended consequences that inadvertently outlaw something Congress never intended to touch. This growing complexity makes it more and more difficult for either companies or lawmakers to forecast the ultimate effects of new tax laws. That’s bad. It’s also expensive."

"Most of the “loopholes” that we argue about are not a result of congressional pandering, or even sharp lawyers who bend sensible rules. They’re an artifact of the fact that calculating corporate income is really hard. 

Why is it so hard? Because unlike with the personal income tax, calculating corporate income tax requires taking account of a corporation’s expenses. The Internal Revenue Service basically ignores most personal expenses because it can assume that the operating costs are the same from person to person. You may think that a BMW and a pied-a-terre in Gstaad are basic survival equipment, but the IRS doesn’t care. Everyone gets the same standard deduction; if they itemize, they can only itemize select big-ticket expenses -- children, excessive medical costs, mortgage interest and so forth.

But that won’t work for a corporation because basic living expenses can vary wildly, from tech firms whose only assets are a few computers and a handful of programmers to airlines and aluminum mills that run huge workforces and buy lots of heavy equipment meant to last decades. If you ignore expenses and just tax revenue, you’ll either end up giving the tech firms a hell of a deal or handing low-margin businesses such as grocery stores a tax bill for 800 percent of their profits.

Once you’ve decided to tax profits instead of gross revenue, you’re going to spend a huge amount of time arguing over what constitutes a legitimate expense (say, flying to Vegas for a major trade show: If you say yes, you’ll ensure that trade shows and conventions are held in a lot of prime vacation slots so business owners can catch a little tax-deductible R&R on the side; if you say no, you may have just outlawed the trade show), when revenue and expenses are recognized, and whether particular transactions have a genuine business purpose. This is not because businesses are all engaged in a nonstop tax scam on the public. It’s because -- as you may know from your own interactions with the IRS -- it’s possible to have legitimate differences of opinion from the government."

"there is no such thing as a fair, simple corporate tax code that can’t be gamed. And the harder we try to squeeze them for each extra dime, the harder -- and more expensively -- they will resist. So here’s my proposal: Let’s not try. Let’s eliminate the corporate income tax, or at least lower the rate so far that they won’t spend so much time and energy trying to avoid it.

There are two possible objections to this. One is that corporations won’t be paying “their fair share” and the other is that giving up the corporate income tax would be very expensive.

The first objection is not a good reason to keep trying to pummel more money out of American companies. Now, I know you’re getting all red in the neck, but hear me out. The truth is that you can’t tax a corporation at all. All “corporate taxes” ultimately come out of the pocket of some person: an owner, a manager, a customer, an employee. A corporation can’t pay its “fair share” because, in the end, a person is paying. 

And the corporate income tax is not a particularly good way to ensure that those individuals are paying their fair share. It’s a blunt instrument that falls equally on all owners -- from filthy-rich hedge-fund managers to lonely widows sitting on a few hundred shares of AT&T. 

But while I don’t agree that we need to make corporations pay their “fair share,” I do agree that jettisoning the corporate income tax would be expensive. So here’s my proposal: Eliminate the corporate income tax and take the money from people. That’s what you’re doing anyway, so do it in a simpler, fairer and more progressive way, by raising income taxes on the wealthy and taxing capital income (dividends plus capital gains) more like ordinary income. And stop wasting everyone’s time and money on this insane, unwinnable chess game."

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