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.
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| "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.
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| "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.
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| 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.
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| 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#