Wednesday, January 11, 2017

The Real Fix for Corporate Tricks


When a Harvard professor who also happens to be a past president of Harvard, a former Treasury Secretary, and economic advisor to President Obama speaks, it’s probably a good idea to listen.  The words of Lawrence Summers carry weight.  They have what the Romans used to call gravitas.  He is Somebody, in italics and with a capital S.
He is also completely wrong.
"There's a way to eliminate corporate taxes and collect MORE?"
In “There’s a Better Way to Reform Corporate Taxes” (Washington Post, 01/09/17, A13), Professor Summers quite correctly criticizes the proposal of House Speaker Paul D. Ryan (R-Wis., if you didn’t know).  Representative Ryan’s idea is to change the corporate tax from a tax on profits, to a tax on cash flows — basically shifting corporations from accrual to cash basis for tax purposes.
The difference in the long run?  All things being equal . . . no difference at all.
The problem, of course, is that all things are not equal.  The U.S. dollar (virtually every world currency, for that matter) has no fixed standard of value.  As far as we know, the value of every currency in the world depends on the faith and credit of the government issuing that currency, not on anything objective.
Isn't basing a currency on the faith and credit of government establishment of religion?
That means that what a currency is worth depends totally on how good an opinion people have of the government.  And what is it people like to complain about most. . . . ?
The bottom line is that governments are going to “create” as much money as they can get away with spending.  This is because with the money supply depending on how much the government has in debt instead of how much the private sector has in assets, there will be inflation.
And in an inflationary economy the longer you can delay paying taxes, the more profitable it will be for you.
"Just do what we're doing. It's worked so well up to now."
What would Professor Summers do instead?  Pretty much exactly what is being done now, only more of it.  That is, he would reduce rates, close tax shelters, broaden the tax base (he doesn’t say how, unfortunately, since “broadening the tax base” means including more entities paying in more in taxes), and “cracking down” on shifting income to tax havens.
Here’s a better idea: why not figure out a way to eliminate corporate taxes altogether?
Think about it.  Who owns corporations?  Not the government.  The shareholders.
Who should receive the profits generated by corporations?  Obviously, the owners.  Ownership includes “enjoyment of the fruits of ownership,” meaning control, disposal, and receipt of income.
Sadly, about the only real right most corporate shareholders have nowadays is disposal.  They can buy and sell shares . . . and that’s about it.  Voting?  Doesn’t usually mean much.
Dodge v. Ford, first test of the Business Judgment Rule.
Dividends?  Are you kidding?  According to “the Business Judgment Rule,” a shareholder only has the right to dividends if he or she can prove that the company does not need to retain earnings.  That’s a logical impossibility, because you cannot prove a negative, that is, the existence of non-existence.
D’oh.  That, by the way, is a good reason for throwing the Business Judgment Rule as far out of court as you can, because the law cannot require an impossibility.  Except when it can. . . .
So, what’s the better way, the way that both Ryan and Summers should be able to support?
Make dividends tax deductible at the corporate level, and fully taxable as ordinary income at the personal level.  If the dividends are used to make debt service payments on the purchase of newly issued corporate shares below a level of capital self-sufficiency (after all, why should people who are already rich be helped to buy even more shares?), defer the taxes on them until the shares are sold.
“But” — you ask — “how are corporations supposed to finance growth if they don’t retain earnings?”  Good question.
Property income and labor income are both income!
The answer is by issuing new shares that people can buy on credit, collateralize with insurance, and repay with the future dividends on the shares themselves.  This means that a lot more people will become shareholders, a lot more people will receive dividend income . . . and a lot more people will be paying taxes.
Voila.  You’ve just simplified the tax code, reduced if not eliminated corporate income taxes, and yet raised the amount that can be collected in taxes.
Nor is that all.  A huge proportion of government spending, possibly 75% or more, is paid to people so they have enough income to meet the cost of living.  If people can meet their own income needs out of dividend income, tax revenues will go up at the same time government spending is going down.  Can you say “Balanced Budget”?
And a reform of the corporate and personal tax system is just one part of Capital Homesteading.  It’s really much better than anything Ryan, Summers, or anyone else is talking about right now.
Maybe it’s time to start talking. . . .
#30#

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