About six months ago, my boss and I got into a discussion about corporate taxes. Now, for some background, my boss comes from old Europe. He self-identifies as a communist, but this is only in the McCarthy sense of the word, he’s just a liberal (i.e-he’s joking). We often sit around and critique conservativism, but since I am still conservative in some ways the discussions are pretty interesting. Anyway. During the discussion, he indicated that he would much prefer it if they eliminated corporate taxation, which he felt was largely unfair and didn’t achieve much. Given that I’ve never heard an unthought-out plan come out of his mouth in the years I’ve known him, I reserved my instant criticism.
He pointed out that it is always in a company’s interest to lower their tax burden. Then he mentioned some ways of lowering a tax burden, like buying someone else’s when a company is going down. Thus, you get lower taxes this year, and whatever intellectual and real capital the company had when it was dying. That’s win-win. He mentioned other ways of avoiding them by less-than-moral means, and indicated that this spelled out two things. One, businesses will tend to grow until they can’t support themselves anymore, and two, that in doing so the number of scandals that come to a head will increase.
I said, Well that’s great, but we need to collect money for the government to run. He then went on to discuss value added taxes with me (which I hadn’t heard about at that time) and I walked away that night well-persuaded that it was pretty much a good idea.
I haven’t really given much thought to the idea since, but lo, the most recent issue of the Economist has an article outlining a very similar idea. Decrease or outright eliminate corporate taxes (which, they argue, in addition to the above points, are inefficient to collect because of the complicated tax-code), but increase consumption taxes through a VAT system which, apparently, are easy to collect and hard to hide from. They further argue that due to the rise of multi-national corporations, even if the companies are making a big profit they can dance around with the numbers so that profit appears in the country with the lowest tax rate, decreasing their burden considerably.
This certainly has some appeal, but I wonder about the flaws of this thinking. My initial reaction, back when my boss mentioned the idea, was that this would make the wealthy hide their income in the corporation, avoiding taxes themselves in the process. What was once a new car for the executive would now be a new car for the company (not that this couldn’t already be done to some extent, of course). Companies could definitely increase fringe benefits in order to hide a person’s real income. Part of my uncertainty also stems from value added taxes. I’m so used to thinking of sales taxes as flat/regressive that I’m not sure VAT compensates. Besides which, even if the US institutes a VAT, how will this counter the argument The Economist made regarding multi-nationals? Won’t they also be consuming in other countries?
Anyone want to put their minds to this topic?