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Aaron Hedges

Better Taxes, Part 3: Reviewing Last Month's Democratic Party Proposal through Partnership Economics



With that context, and the fuller perspective we lay out in Better Capitalism, we turn attention to the tax proposal recently approved by the House Ways and Means Committee, part of the Biden administration's Build Back Better Agenda. Agreements and virtues are important, but policy is where the rubber meets the road. There is unfortunate truth in the line that "the devil is in the details." Some of the details in this policy proposal truly are devilish.


The proposal includes provisions affecting businesses and others affecting individuals; for now we focus on the business-related matters. We will view them in light of three Partnership Economics principles for better taxes -- simplicity, closing loopholes, and reducing the corporate tax rate.


Simplicity: Our first principle for taxes -- and all government policy for that matter -- is to keep it simple and brief. This is not an anti-government stance. Adam Smith himself wrote of "the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system." Along with the "father of capitalism," we recognize the potential for public policy to play a positive role.


The simpler a policy is, the more understandable, actionable, and enforceable it is. Greater simplicity also fosters an even playing field, whereas complexity disadvantages smaller companies that can less afford armies of accountants and tax attorneys for interpretation and implementation. This link on the Ways and Means Committee website lists ten documents related to this proposal. Read just a few paragraphs, and "simplicity" will be long gone. The documents add up to hundreds of pages of that dense language.


Does the tax proposal feature simplicity? Nope.


Closing Loopholes: In our book and elsewhere, we have called for removing loopholes -- all of them. What if the corporate tax code could fit on a single page? We recognize that may sound radical, but is it really more radical than a proposal that needs ten documents and hundreds of pages to explain it? Even if certain loopholes seem appealing on their own, such as by incentivizing a beneficial action, once the loophole door is opened they multiply exponentially. In addition to undermining the first principle of simplicity, mazes of loopholes create at best inefficiency and more often distortion and manipulation.


Photo Credit: quotefancy.com



The good news here is that this tax proposal does reduce some international tax loopholes. Does that sound like condemning with faint praise? Reducing loopholes is not the same as closing them; some of course means not all; and international doesn't apply to taxes right here in the U.S. Perhaps we could be more upbeat about the slivers of progress, but unfortunately the most glaring loophole -- absence of a domestic corporate minimum tax -- is completely unaddressed. This is in stark contrast to the Biden administration's earlier "Green Book" proposal, which included a 15% minimum tax on corporations earning over $2 billion, and the spirit of the G7 agreement we applauded in May.


Furthermore, this proposal creates new loopholes. Although President Biden has talked about wanting to end the maneuvering of profitable companies that pay no taxes, this proposal not only fails to close current loopholes -- it creates more loopholes, more room to maneuver out of taxes for companies that can afford to play those games. Talk is one thing; policy is where the rubber meets the road.


Bi-partisan common ground is hard to come by in the current political climate, but this proposal's handling of loopholes has done it. Progressive tax groups are concerned that loopholes are not only preserved but newly created, allowing bigger companies to actually pay less in taxes, AND conservative tax groups are bemoaning a shrinking tax base compounded by higher nominal rates.


Does the tax proposal feature closing loopholes? There is a little yes here, but mostly nope.


Reducing the Corporate Tax Rate: Simply put, nope. This proposal raises the corporate tax rate -- at least for those companies that can't afford to exploit the loopholes. We contend that more tax revenue could be generated by a lower corporate tax rate if all corporations in fact paid the same rate. More tax revenue, via lower rates spread more fairly and more efficiently is possible. Instead we (those of us who can't afford armies of accountants and tax attorneys) pay the price for loopholes in the form of higher tax rates.



Summary: We realize these are complex matters -- and that is precisely why we advocate for greater simplicity. A lower tax rate without loopholes will be not only more equitable but far less burdensome to administrate -- it is precisely the simplicity that makes it effective (hard to dodge, hard to manipulate, paid evenly by all). The current proposal leans more toward loopholes for favored activities, which may sound noble in their substance, but this mode increases complexity and creates a need for a higher tax rate, which will fall disproportionately on smaller companies that can't exploit the loopholes. We contend that all companies -- including the ones that would benefit some from the recently approved loopholes -- would benefit more from a simple corporate tax that has a lower rate and no loopholes.


This is simple in concept, but not easy to bring about given the massive momentum in the opposite direction. It is not easy to bring about, but worth pursuing.


As we've said before, we would be intrigued to hear from any company a public statement as to why it prefers higher, complex taxes to lower, simpler ones.


What about you? Share your story, question, comment, idea, disagreement -- yes, we welcome disagreement for the sake of mutual benefit! -- with us at blog@PartnershipEconomics.com. We will give a thoughtful response, with prioritized attention to emails from our subscribers. Subscribe here >>

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