WASHINGTON – In a clear and totally non-partisan WSJ op-ed piece, (We Must Stop Driving Businesses Out of the Country, May 9, 2014), Senator Ron Wyden, a Democrat from Oregon, and Chairman of the Senate Finance Committee, makes a case for comprehensive corporate tax reform.
Tax avoidance drives business decisions
In his piece he points out that many large US corporations make significant foreign acquisitions mostly for tax avoidance (better to say tax evasion?) purposes. The latest headline is about the US pharmaceutical giant Pfizer buying UK-based AstraZeneca, so that it can “relocate” to the United Kingdom for tax purposes.
Indeed, if a US corporation can legitimately claim that 20% or more of its stock “is owned by their new, foreign partner” the same corporation can shift its tax domicile to the country where the new subsidiary is located, usually a country with a lower corporate tax rate. This way, in a totally legal way, a large US corporation can cut its tax bill.
Of course, this should not happen. And Wyden pledges his intention to introduce legislation that would close this loophole.
US corporate tax rates are too high
However, at the same time, Wyden recognizes that US corporations are exploiting every possible “legal” avenue to escape from a very heavy US tax burden.
Yes, America, the cradle of capitalism, has one of the highest corporate tax rates in the world: 35%. We know that in many cases this is largely theoretical. Many companies pay much less, or (in some instances) very little, or nothing at all. And this “magic” of a low tax bill despite a high tax rate is due to a jungle of special provisions, tax credits, dispensations and loopholes, incomprehensible to most, that allow many corporations, depending on the sectors they operate in, to pay less.
Lower rates, no loopholes
Without getting into the impossible details of the monstrosity of the US tax code, Wyden proposes a simple, common sensical, approach. Let’s lower the US corporate tax rate, while at the same time eliminating all the loopholes and special treatments for this or that sector.
This way US corporate taxation will be more in line with prevailing rates applied by other developed countries, (about 25%). And this would mean that US corporations would not be incentivized to pursue business strategies that are in fact mostly, in certain cases entirely, tax avoidance strategies.
Indeed, in an ideal world, the allocation of scarce capital should be driven by business factors and not by calculations of tax advantages. I fully agree.
“Debt Commission” had a similar approach
Going back just a few years, (2010), the “Debt Commission” co-chaired by Republican Alan Simpson and Democrat Erskine Bowles had the political courage to come up with a decent federal spending reduction program matched by a comprehensive tax reform plan. It all made perfect sense. It was a good starting point, that had at least some measure of bipartisan support.
But nothing, absolutely nothing happened, in large part because President Obama essentially distanced himself from the findings and recommendations of the Simpson-Bowles Commission.
What Senate Finance Committee Chairman Wyden suggests now is more limited in scope but essentially in line with the approach that inspired Simpson-Bowles: lower the tax rates, broaden the tax base and eliminate all tax favors to this or that sector. This would be good for the economy, good for the US Treasury and good for individual businesses, especially small and medium-sized companies that would no longer have to spend inordinate amounts of time and resources on tax issues. Everybody would pay, but not too much.
Good idea, (whose time has not come)
All this makes perfect sense. Wyden is not in the pocket of this or that interest group, nor is he trying to mount a populist anti-business crusade that may resonate with the ideological left.
He is proposing common sense. Well, you would think that the traditionally pro-business Republicans would respond enthusiastically. But I doubt it.
Special interests dominate US politics
And sadly this is because behind the “We-are-the-fearless-defenders-of-free-market-capitalism” label, many Republicans (and Democrats too) are subservient to the wishes of the armies of lobbyists permanently encamped in Washington DC.
The lobbies and the powerful economic interests they represent are largely responsible for the grotesque US tax code, with all its ultra-complex and in fact impenetrable layers of special provisions. They are experts at pushing this or that “provision” (often worth hundreds of millions of dollars) at critical times, in sometimes obscure pieces of legislation nobody really understands.
Corporations, lobbies and campaign finance
The ugly truth is that, while the US economy as a whole suffers because of this ghastly hodgepodge of dispensations and special credits, many economic sectors benefit from it. And so they will fight tooth and nail to keep things as they are. And, of course, at election time, money talks. Elected representatives need vast and always larger sums of money to finance their re-election campaigns. Directly and indirectly, corporations are a major source of those needed finances.
Dysfunction is now system
So, here we are. In large part because of our dysfunctional politics, we have elevated tax dysfunctionality to system. We say that America is the best place in the world to do business, while in fact we have created a tax and regulatory environment that pushes US corporations to relocate their headquarters and/or key operations abroad.
Sensible ideas will be ignored
Ron Wyden, a fair-minded Democrat, proposes sensible reforms. But I doubt that he will find enough allies –Republicans and Democrats– to make something happen. In order to cut the Gordian knot of the absurd US tax system, we need a new political consensus.
Yes, we need to rediscover the simple truth that the job of people sent to Washington is to pursue the “common good”, as opposed to electing Representatives and Senators who will respond mostly to the demands of special interests.
Sadly, I do not see this “back to basics” (but in essence revolutionary) transformation coming along.