My Two Cents

Corporate taxes for energy taxes

Chris Farrell May 6, 2009

The Administration says it plans on cracking down on offshore tax shelters and avoidance. The target of the initiative is U.S.-based multinational corporations and wealthy individuals. The money that is earned overseas and then kept in offshore tax havens is some $700 billion. No one really knows, but that the best guesstimate out there.

Multinational corporations and rich folks keeping money offshore to evade taxes won’t generate a lot of sympathy except from the all-taxes-are-bad crowd. But many economists legitimately worry that enforcement will put U.S. companies at a competitive disadvantage in the international market.

Mike Mandel at Business Week gets to crux of the problem:

As the old saying goes, the road to hell is paved with good intentions. For decades various Washington politicians have tinkered with corporate income tax rules with the laudable goal of getting U.S.-based multinationals such as General Electric (GM) and IBM (IBM) to pay their “fair” share of taxes on growing overseas operations. The result has been a disaster–a system no one understands that requires vast resources to administer while raising very little revenue. The current corporate tax rules even seem to encourage U.S.-based multinationals to move jobs overseas, although no one really knows for sure.

Unfortunately, President Barack Obama’s latest proposals to get U.S.-based multinationals to pay higher taxes on their foreign profits do nothing to fix these problems. The tax system will get another layer of complexity–effectively a “stimulus package” that benefits tax lawyers and accountants who find new loopholes.

Mandel proposes that the Obama strike a blow for simplicity and jobs by reducing the corporate income tax rate from its current 35% to 25%. The quid pro quo is that companies make their income tax returns public, at least in summary form.

Mandel called his idea radical. Simplicity and transparency is good. But here’s my thought and I’ll label it utopian. Over the years, I’ve become convinced that we should get rid of the corporate income tax altogether. But you can’t just get rid of it. The hole in the federal budget would be too great, and forget about tapping into any supply side vodoo to deal with the problem.

But what about this deal: Eliminate the corporate income tax and substitute an energy tax. I believe there would be gains in jobs and wages from the shift. The would stimulate conservation and sustainability initiatives. It would also create market-based incentive for entrepreneurs to come up with new products that sharply reduce our carbon footprint. Since the Administration is going to need tax revenue to help pay for universal health insurance it can be wrapped up in the big swap.

What do you think?

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