Saturday, September 10, 2016

Replace Clinton's Third Way of corporate taxation with a progressive solution

A few years ago, I wrote Corporate Compensation Tax, On a Curve, just as a thought experiment to see how best to tax C-class executives of a corporation. The idea was to tax C-class compensation based on a multiple of the lowest paid workers receiving the minimum wage. It would look something like this:
All limited liability entities are required to pay a marginal tax on all non-hourly employees and executives within the organization. The rate structure is based on the measure of the federal minimum wage in multiples. Here is a simple schedule for the tax rates, where x is the minimum wage:
It seemed like an interesting concept at the time, but I realized after writing it that enforcing that kind of tax policy could get complicated in a hurry. This is part of the problem with our tax system now. The rules are so complex that in order to take advantage of every deduction, you need a team of lawyers and accountants to do it. Guess who can afford that team.

So it is with interest that I read this article, The (Bill) Clinton Team’s Secret Meeting on CEO Compensation, at Naked Capitalism. What I learned is that when Bill Clinton was president, they were looking at ways to retain a tax deduction for C-class compensation without being too obvious about it. What they decided upon was a simple provision. C-class compensation would remain tax deductible after the first $1 million, so long as it is in the form of stock options. Here is a brief excerpt from their article:
Naked Capitalism readers are familiar with the fact that CEO compensation exploded starting in the 90s, and that this explosion was related to a shift towards companies providing compensation in the form of stock options.  A major cause of the shift was Bill Clinton’s 1993 move to make executive comp deductible from corporate income taxes only when given as stock options.
Let’s say that one more time:  a small change in tax law, spearheaded by Bill Clinton, provided the initial impetus for the runaway rise in CEO comp, itself plausibly a significant driver of our own era’s lopsided distribution of economic gains.
It was a tiny change in tax law that few people notice, but it had a huge effect on CEO compensation. That change in tax law would explain the emphasis on stock price in the following years. Most public corporations now have a laser focus on stock price because that is the path to apparently unlimited income. This would also explain the inexorable push to increase capital investments (automation, robots, computers) at the expense of labor. Capital investments tend to raise the value of the stock, not the cost of labor and that has created a conflict between capital and labor.

The Clinton Administration passed a simple provision that was easy to enforce, yet still allowed C-Class compensation to grow to stratospheric levels, all at the expense of labor. Given the past inclinations of the Clintons, particularly with respect to their blind deference to corporate money, we can be sure to see more of the same should Hillary Clinton win the election come November. Whenever I hear Clinton claim to be progressive, I have stuff like this in the back of my mind.

The mainstream media has given due notice of the tax avoidance schemes of the largest corporations but only because there was demand for tax avoidance to be exposed. Public scrutiny of $2 trillion in offshore money held by our largest corporations, inversions, and other methods of tax avoidance have incensed progressives. Yet few people really understand that both Democrats and Republicans have abandoned the middle class and the poor for the big money of large corporations like Apple, Comcast, Monsanto, United Health Care and Pfizer (just to name a few).

The largest corporations own large portfolios of intellectual property often held by subsidiaries offshore. They have parked huge sums of money offshore to avoid taxation and they engage in the shady practice of inversions when no one is looking. At the same time, corporate profits are at historical highs along with astronomical CEO pay and stock options. Back in January of this year, economist Dean Baker took notice of the enormous efforts directed to tax avoidance and has offered a simple plan to resolve the issue in his article, A Progressive Way to End Corporate Taxes. Here it is, in a nutshell:
Suppose that, instead of taxing corporate profits, we required companies to turn over an amount of stock, in the form of nonvoting shares, to the government. We can fight over the percentage later (we’d want to match what we ideally get from corporate income taxes now, so presumably between 17 and 35 percent). But first we can focus on the principle.
The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.
This plan strikes me as genius. It's a simple plan that makes it nearly impossible for corporations to evade their taxes. It requires collateral to be held by the government in order to ensure that taxes are paid. Under the plan the government would own a part of every corporation, yet have no controlling interest in it. When dividends are paid, the government gets a cut. When shares are sold, the government gets a cut. When the company is sold, the government still gets a cut, even if the company undergoes an inversion.

Best of all, the plan removes a big chunk of the bureaucracy build into our tax system. Then big business can focus again on making services and products people want to buy rather than finding creative ways to escape the system. Once big business can resume their focus on making products that people want, then perhaps there might be enough demand for people to buy them. Big business might even see enough money saved from Baker's plan to consider paying their employees more to boost demand.

Would Hillary Clinton adopt such a plan? Well, she's a lawyer and she likes laws that leave enough wiggle room for enterprising attorney. She'd want the biggest donors to be able to make arguments in administrative hearings at the IRS or in court to allow corporations to defeat corporation taxation or lessen their burden. We already know where Donald Trump would stand on such a plan. He would not allow government to own a piece of every corporation, even if they were nonvoting shares and even if that meant the end to the overhead costs of tax avoidance.

There is another reason this plan makes sense. Incorporating a business is a privilege. It is a license to do what would otherwise be "illegal". Succession of control is a privilege that allows an organization to be immortal. Limited liability is privilege as most people are personally liable for the acts of their business, but corporations are only liable for the value of their stock. Claiming a domicile in a mailbox in the Cayman Islands while doing business in the United States is a privilege. Ordinary people live where they work.

Baker's plan doesn't deal with corporate money in politics, but it can end the mind games played by corporations as far as tax policy goes. Baker's plan would remove incentives for corporations to influence tax policy by removing all the loopholes and creating one simple tax.

Most interestingly, Baker's plan creates a powerful incentive to put the money into the business, not the dividends or CEO compensation. Think about how uncomfortable it might be for a C-class executive to know that if his company changes control through a sale, the buyer must pay the government for the shares held by the government. Every time a dividend is paid, the government gets the same dividend on shares held. Every time someone sells a stock option, the government is going to get a cut of that sale.There will be no way out, yet at the same time, corporations will find relief that they don't have to pay a team of lawyers to be creative about taxes.

I don't see any way that Clinton or Trump would support Baker's plan. But, the Green Party might be amenable to it. Given their stance on economic justice in their party platform, I think they would be willing to support such a simple idea. One of the goals of the Green Party is to simplify the tax code, make it more progressive and make it more transparent. I think that Baker's plan would fit right in with the Green Party.
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