An Honest Approach to Simplifying Corporate Income Taxes

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(Photo: Alfexe / Getty Images)

 

The Republicans are trying to pitch their tax cut plan as being a major step toward simplifying the tax code. While there is little doubt the plan will mean large tax cuts for corporations and their shareholders it is not clear that there will be much simplification. Corporations will still be able to have large tax savings by hiding profits overseas and other tricks.

However, it is possible to envision a change to the tax code that would genuinely simplify the system. Suppose that instead of paying income taxes each year, corporations were required to turn over a portion of their stock to the government, let’s say 25 percent, in the form of non-voting shares. 

The rule would be that these shares are treated just like other shares of the company’s stock. If the company pays a $2 a share dividend to holders of its regular shares, it also pays a $2 dividend on each of the government’s shares. If the company buys back 10 percent of its outstanding shares at $100 per share, it would also buy back 10 percent of the government’s shares at $10 each. If another company wants to take over the company, buying up shares at $150 each, the company also has to buy the government’s shares at $150 each.

The only difference between the shares owned by the government and the stock held by other shareholders is that the government would have no voting power associated with its shares. This is not an effort to get government control over the means of production. It is simply an inescapable route to its tax revenue.

This should be a path that both liberals and conservatives can embrace, even if they disagree on the best tax rate. Under the current system, or the Republican proposal, companies can achieve large tax savings by gaming the system. As a result, they spend tens of billions of dollars on tax lawyers and accountants who develop sophisticated schemes to limit their tax liability. 

Everyone agrees this is a complete waste of resources. From an economic…

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