Simplicity

Dean Baker has some absolutely fascinating ideas regarding tax policy.

“I find it amusing and fascinating that there are literally 10s of 1000s of people who would have to do something economically productive with their lives if Baker’s idea were ever implemented—you can just imagine the titanic propaganda offensive that would be launched against this idea if this idea ever appeared on the national stage in the US.”

“NVS seems—in general—to be the more foolproof system. And NVS keeps the money from going to the shareholders—this is a foolproof way to reduce consumption, which is what taxation is supposed to achieve.”

“But TSR is much harder to propagandize against. And TSR is an option for states and cities, whereas NVS isn’t—states and cities need to raise money.”

“So TSR has some advantages. And both systems would face nuclear-level opposition from entrenched interests.”

People think that taxes are boring, but it’s not true, since taxes are exciting and interesting—taxes are one of the most important things.

I find it intriguing how people’s attitudes toward taxes tell you a lot about how much people regard the government as democratic. I also find it intriguing how the richer you are the more tax policy becomes the center of your interest, since you start to have millions—or even billions—of dollars at stake when it comes to tax policy.

Dean Baker has tax-policy ideas that blew my mind and made me extremely interested in taxes. I’ll call the first idea Tax Stock Returns—“TSR” for short. And I’ll call the second idea Non-Voting Stock—“NVS” for short.

TSR

Baker discusses TSR in his 14 August 2020 piece—I took the following notes:

• regarding the corporate income tax, the “basic story” is that we can switch the focus “from corporate profits to stock returns”—this will (1) “make sure that the corporate income tax is collectible” and (2) “radically reduce the resources required to administer the process”

• “This is what tax reform should be about.”

• the “current system” is “focused on the wrong target”—we shouldn’t tax corporate profits and we should instead tax stock returns

• the pre-2017 “corporate income tax rate was 35%”, but actual “tax collections were typically around 20%-22% of corporate profits”—it “makes little sense to have a high tax rate that is easily avoided or evaded”

• it “simply encourages companies to spend large amounts of money gaming the system” when you have a system that makes it so easy to avoid and evade taxes—this “gaming is a complete waste from an economic perspective”

• “almost all economists would prefer to have a lower tax rate that is actually collected”—we “have many highly skilled people spending their time finding ways to play tax tricks rather than doing something that is economically productive”

• the 2017 tax cut was supposed to lower the nominal rate but actually collect that rate more effectively

• this never happened—the 2017 tax cut lowered the nominal tax rate “from 35% to 21%” and also lowered the effective tax rate about 40% to “just 13.3%” in 2019

• “the taxation of stock returns gives us a surefire way” to cut down “on tax avoidance and evasion”—we “simply apply whatever tax rate we are targeting to the returns that shareholders receive in a given year”

• “Let’s say we have a tax rate of 25%. Suppose a company’s stock has a market value of $100 billion on Jan. 1 and $105 billion on Jan. 1 of the following year, and that it pays out $3 billion in dividends over the course of the year. This means the returns to shareholders have been $8 billion over the year, which would make its tax bill $2 billion (25% of $8 billion).”

• this “calculation is about as simple as it gets”—it (A) “requires no complex accounting” and (B) “leaves no room for companies to rip-off the Internal Revenue Service unless they are also ripping off their shareholders, in which case the government will have some powerful allies in collecting the taxes owed”

• one problem is that “most major companies now operate in multiple countries”—this “is a major problem for the current tax code as well”

• the “logical solution is to prorate the tax rate based on sales over some prior period”—if “60% of the company’s sales, on average, have been in the U.S. over the last five years then 60% of its stock returns in the current year will be subject to this stock returns tax”

• another problem is that “stock returns are erratic”

• this “can be dealt with through averaging, where taxes are based on the last four or five years of returns”—the “formula remains simple and can be calculated on any spreadsheet”

• there’s “the obvious point that basing a corporate income tax on stock returns is not feasible for privately traded companies”

• this “doesn’t undermine the advantages of this switch”—publicly “traded companies earn the vast majority of corporate profits”, so the “IRS will free up an enormous amount of staff for monitoring privately traded companies” if determining the publicly traded companies’ “tax liability can be reduced to a simple calculation based on stock returns”

• this “simplified treatment will also give privately traded companies a large incentive to become publicly traded”—any “company that was not actively looking to rip off the IRS” could become publicly traded and determine “its taxes based on a simple calculation” and “save itself a substantial sum in accounting fees”

• states “can also opt to go this route of taxation based on stock returns”—states “would have a targeted tax rate which they can then apply to the share of sales that occurs within the state”

• this “will substantially reduce the burden states now face in monitoring corporate income tax collections”—this would be “good policy for any state choosing to go this route”

• any state that goes this route will provide an example for other states—and also for the federal government—to follow

So this “is what tax reform should be about”—you want a collectible tax and a cheaply administered process.

I find it amusing and fascinating that there are literally 10s of 1000s of people who would have to do something economically productive with their lives if Baker’s idea were ever implemented—you can just imagine the titanic propaganda offensive that would be launched against this idea if this idea ever appeared on the national stage in the US.

NVS

Baker discusses NVS in his free 2016 book Rigged—I took these notes:

• the “tax shelter industry itself” is an “underappreciated” aspect of the tax system—this industry is itself “a major source of inequality”

• you could “reduce the complexity of the corporate income tax without jeopardizing it as a revenue source”

• a “simple route would be to have firms turn over non-voting shares to the government as a replacement for the income tax”—for example, firms could be “required to make a one-time transfer of stock equal to 30 percent of their outstanding shares” if “the targeted tax rate is 30 percent”

• these non-voting shares “would give the government no control”—the “goal is to secure a claim to corporate profits, not to run companies”

• “Apart from issues of control, the government’s shares would be treated just like other shares of common stock. If the company pays a dividend of $2 a share on its common stock, then it would also pay $2 a share on the stock held by the government. If it buys back 10 percent of outstanding shares at $100 per share, then it would buy back 10 percent of the shares held by the government at $100 per share. If a private equity firm buys out the company, paying $120 per share, then it would pay $120 for each share held by the government.”

• such a system would (A) “hugely reduce the complexity of the current tax code” and (B) “drastically reduce the opportunities for gaming” and (C) “reduce the potential profits in the tax-gaming industry”

• maybe a “system of share issuance” would be “too great a lift politically”—in that case, it “should be possible to create a share issuance alternative on a voluntary basis”

• “businesses that opted to issue non-voting shares to the government could permanently end their tax liability”—“companies that are not trying to game the system” would “no longer have to pay as much to accountants for calculating their taxes”, so this “should be a major money-saving move” for the companies that don’t intend to game the system

• this “voluntary system would also reduce enforcement costs”

• “enforcement should be a relatively simple matter for the firms that issue shares” voluntarily—the “only question for the Internal Revenue Service is whether these shares are being treated the same way as the firm’s common shares”

• under this voluntary system, the IRS “could focus its attention on the companies that are actively trying to game the system”—this would presumably make “gaming more difficult”

• you can get a sense of “the potential savings from reducing the gaming of the tax system” if you look at the fact that the private equity industry “had almost $3.5 trillion in assets under management in 2013”—“the industry’s income would be $105 billion annually” if you assume “a management fee of 3.0 percent”

• “the savings would be $35 billion annually” if “closing the tax and regulatory loopholes” that the private equity industry exploits “eliminated one-third” of the industry’s income

• eliminating half of the industry’s income “would provide annual savings of $53 billion”—“there are many law and accounting firms that are unconnected to private equity that also profit from exploiting these shelters”, so this “is undoubtedly a conservative estimate of the potential savings from reducing access to tax shelters”

• “reducing the ability for this sector to profit would be an effective way to reverse the upward redistribution of the last three decades”—“many private equity partners are among the richest people in the country”

So NVS is an interesting system—you just have to ensure that the “shares are being treated the same way as the firm’s common shares”.

Let’s compare NVS and TSR—which is better?

NVS seems—in general—to be the more foolproof system. And NVS keeps the money from going to the shareholders—this is a foolproof way to reduce consumption, which is what taxation is supposed to achieve.

But TSR is much harder to propagandize against. And TSR is an option for states and cities, whereas NVS isn’t—states and cities need to raise money.

So TSR has some advantages. And both systems would face nuclear-level opposition from entrenched interests.