Joseph W.H. Lough
Last week an unnamed individual, whom I will call “my mother” because – well – she is my mother, sent me a clipping from the New York Times, an article by David Leonhardt titled “Who Will Crack the Code?”
In her impeccably neat handwriting “my mother” appended a note, “Please Explain.”
The gist of the article is that tax law in general and corporate tax law in particular in the US is highly irrational, rewarding companies with saavy CEOs or easily transportable (or concealable) products with low tax rates and punishing companies who have neither. If I have an intangible asset, such as a string of software code, why not “house” it in the Cayman Islands, or (Mr. Leonhardt’s example) if I make soft drinks why not manufacture them in places like Ireland or Singapore that offer corporations an attractive tax rate?
All bluster and finger-pointing aside, US corporations (or international corporations with a principle US interest) behave the way they do because the US Congress has told them that its OK. Thus Apple’s 14% tax rate. All Congress would have to do to change that rate would be to close the “loopholes” that invite Apple’s tax attorneys and accountants to take advantage of them. In a moment, I want to tease apart this little word “loophole.”
Ok, “Mom.” Be patient. I’m getting to the point.
Corporations are private entities; in Greek we would call them oikonomia, that is to say “private enterprises.” Oikos is the Greek word for home. So, if you want to know why the issue of taxes is so contentious, the reason is that no one likes it when their home is broken into and its contents pillaged. And this is the reason that private enterprises do not like taxes. Period.
And, yet, as we all know, corporations or incorporated by public entities; in Greek we would call these entities politeia, in Latin res publica. That is to say, in order for any entity to legally engage in private enterprise – which entails connecting private households to one another in some manner – they must first present themselves before the politeia, the res publica or Republic, and show how and why their incorporation benefits not only the two or more private households, but also the politeia that their transactions will undoubtedly influence.
Optimally, those granting incorporation have no vested interest in the outcome; that is to say, their overriding interest is in res publica, in the Republic, or “the wealth we hold in common.” If it turns out that incorporation provides an unmitigated benefit to all members of the community, then it may be that communities will compete in order to attract and incorporate a private entity. If, on the other hand, an entity’s incorporation will exact some cost – let us say polution – then the community will only permit incorporation when that private entity pays the community at least as much as it will cost the community. But it will be up to the public – res publica, politeia – to judge, one way or the other, what precisely the costs and benefits might be before they permit a private entity to incorporate.
But “costs and benefits” are not one thing and not another. A corporation might polute, but it also might provide employment. It might clog roads and attract unwanted visitors, but it also might produce goods or services of value to the community.
And this means that when the public weighs whether it will allow a private entity to incorporate, it invariably also thinks about incentives and deterrents; and it is precisley here that loopholes come into the picture.
Let’s say my community has an across-the-board “flat tax” on all private enterprise; but let us say that unemployment has been rising and there is a possibility that we can attract a significant private employer. But let us also say that among the considerations that will help that private employer decide where it will locate is the local tax rate. Will my community be willing to make an exception to its “flat tax” policy in order to attract this employer? Loophole.
Or, let’s say that several corporations are competing to relocate in my community, but that my community has decided that it will favor private enterprises that make use of new technologies that give off less polutants; or let us say that I promise a lower tax rate to private entities that adopt new “clean” technologies. Loophole.
Or, let’s say I am concerned that none of the members of my community enjoy the skill-sets called for in a company that I am thinking of granting incorporation to, but that I might be willing to grant them incorporation if they implement a job-training program linked to the local community college. Loophole.
Tax codes are complicated because they provide one of the most efficient means for enacting incentives and disincentives.
Ok, “Mom.” I’m getting there.
Now, there are some folks who are sworn enemies of res publica, of the wealth we hold in common. They do not believe in the public or common wealth. They do believe in politeia. They believe only in oikonomia. These folks think that the question surround tax reform is bogus from the beginning because it presumes that: (1) public entitites should have the authority to grant or deny the incorporation of private entities; (2) public entities have the authority to tax (or reward) private entities depending on their public policy interests; and (3) public entities have the authority to craft corporate law to meet public aims.
Since in their view all three of these presumptions are illegitmate, there are some folks who simply want to get rid of taxes – or, in any case, federal taxes – Period.
(As I have pointed out elsewhere, these folks are antirepublicans, enemies of the Republic, hostile to the US Constitution, in particular, and to the modern western political tradition in general. This group lost in 1783. They lost again in 1865. They lost during the New Deal and again in 1964 and 1965 when the Civil Rights and Voting Rights acts passed Congress.)
There are others, however, who evidently believe that men and women who accept millions of dollars in bribes from private entities are nevertheless able to reform a tax code that will genuinely serve the public interest rather than the interests of the private entities from whom they accept these bribes.
I don’t buy it. Yes, there ought to be a balance between the interests of private enterprise and the public. Traditionally, however, the judge of where that balance ought to fall was the public. The public should decide how to balance jobs against polution, private commodities and markets against public health and security. And the public should be able to make these decisions without the interference of those who have a private stake in the outcome. That is to say, the judge should not be on the payroll of the private enterprise.
Under present conditions, not only is US Congress weighed down by a class of congressmen and women who are, to put it lightly, constitutionally tone-deaf, but their decisions are further freighted by millions of dollars in campaign donations – “free speech” our constiuttionally tone-deaf Supreme Court calls them – that virtually guarantee that, no matter what the outcome, it will not be in the interest of the common wealth, but, rather, in the interest of private wealth.
Should the tax code be reformed? Absolutely. Should it be reformed by men and women who are on the payroll of the very parties they are being asked to regulate? Absolutely not.
Before we crack the tax code we must break Congresses dependence on private money, once and for all. Only then can we expect a tax code – loopholes and all – that truly reflects the interests of the Republic.
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