By James Kwak
Here’s my solution to our national debt. We have a one-time, 100 percent tax on all wealth (net worth) of all United States residents, with a $10 million per-person exemption. With household wealth at around $60 trillion, that should be plenty to pay off the accumulated debt and shore up Social Security and Medicare for the next century.* The government promises never to do it again. Since we only care about future behavior, a one-time wealth tax should have no impact on people’s incentives to work, and hence no distorting effect on the economy.
Don’t like that idea? How about this one. The Federal Reserve creates $20 trillion in money but, instead of crediting it to large banks’ accounts at the Fed, it credits it to Treasury’s account. Again, no more debt. Again, the Fed promises never to do it again.
Yes, those are stupid ideas. They are stupid because no one would believe that the Treasury or the Fed would never do it again. If the Treasury were to go and confiscate wealth from billionaires and double-digit millionaires, they would leave the country (along with many other people who wanted to be double-digit millionaires).** If the Fed were to hand $20 trillion to the Treasury, everyone would start dumping dollars and it would become impossible for the government to borrow money at low interest rates the next time it needed it. People’s actions (working, buying bonds) depend on their expectations of future government actions. The fact that the government has never done something doesn’t prove that it never will, and if it did it once that wouldn’t prove that it would do it again, but in either case it’s persuasive evidence.
So if no one could propose a one-time wealth tax with a straight face, how come people can propose a “one-time” corporate tax amnesty with a straight face? Yet that’s just what multinational corporations are pushing for; see this article by Peter Coy and Jesse Drucker or Drucker’s Fresh Air interview. The U.S. has a top average tax rate of 35 percent, but multinational corporations have gotten very good at shifting their income to overseas subsidiaries in places like Ireland and Bermuda that have much lower corporate tax rates, often avoiding U.S. corporate tax entirely. According to David Kocieniewski of the Times, for example, G.E.’s U.S. tax rate is 7.4 percent, and that’s including taxes it will not pay until it repatriates profits to the U.S. For 2010, it’s claiming a refund of $3.2 billion.
The “solution,” according to those same companies, is for the U.S. to offer a tax amnesty that will allow them to repatriate profits (which they have to do in order to, for example, pay dividends or buy back stock in the U.S.) at much lower tax rates — like zero. The lobbyists’ talking point is that if the companies have more cash in the U.S., they will invest it in ways that will create jobs. This doesn’t even pass the laugh test: as Coy and Drucker report, U.S. nonfinancial companies are already sitting on over $1 trillion in liquid assets within the U.S.
We’ve tried this before. In 2004, Congress passed a similar tax amnesty (companies were allowed to repatriate profits at a tax rate of 5.25 percent). Companies brought back lots of profits, the Treasury got a small bump in tax revenues, and companies learned that they should stash even more profits overseas and wait for the next amnesty. According to research by Thomas J. Brennan, the amount of profit stored overseas reached its 2004 peak as early as 2006 and has only grown since.
Tax amnesties may look good because they increase tax revenue in the very short term. But this is just an example of why, as Daniel Shaviro argues, it’s stupid to look just at the annual deficit, or even the next five or ten years. A tax amnesty unambiguously reduces the present value of future tax revenue, even leaving aside the incentive effects.
And how about those incentive effects? If we’re going to pretend that a tax amnesty for corporations won’t have any impact on their future behavior, then why don’t we pretend that a one-time wealth tax won’t have any impact on future behavior, either? In either case, there’s a short-term effect and a long-term effect. The same people who argue for the tax amnesty by pointing to its short-term effect would be horrified by a one-time $20 trillion Fed bailout — because of its long-term effect on the Fed’s credibility and the ability of the government to borrow money.
In other words, there are plausible arguments that can be made on either side of most issues, and people pick and choose the arguments they like to suit their political objectives.
By the way, there is a real substantive question as to whether we should even have a corporate tax. Much as we may like the idea of taxing corporations, the corporate tax flows through to real people, and no one is quite sure how it flows through. It also includes some obvious distortions, like the double taxation of dividends as opposed to interest on debt, which encourages higher leverage. I would be open to eliminating the corporate tax altogether and replacing it with more progressive income tax rates or a wealth tax. But as long as we have a corporate tax, it’s crazy to have it in a form that favors multinational corporations with expensive lawyers and shell subsidiaries all around the world and that penalizes domestic businesses without expensive lawyers. If nothing else, paying lawyers and setting up shell subsidiaries cost money and provide no economic value.
But instead of dealing with serious issues, it seems like the IRS is going after individuals for — get this — falsifying their income on stated-income loans. Yes, they’re going after borrowers. Joe Nocera tells the story of Charlie Engle, who is going to jail because an IRS agent saw him in a movie about ultra-marathoning and wondered how he found time to train for it; because the IRS sent an “attractive female undercover agent” after Engle on suspicion of money laundering; because Engle or his broker falsified his income on a mortgage application; and because the broker testified against him and got a shorter sentence, despite pleading guilty to falsifying multiple mortgage applications (since when do you give the more senior person a plea to testify against the more junior person in the conspiracy?). The kicker is that Engle is going to have to pay $262,500 in restitution to Countrywide, the “victim” in this affair.
I like taxes more than the next guy. As Oliver Wendell Holmes is reputed to have said, “I like paying taxes. With them I buy civilization.”*** I’m generally not sympathetic to complaints about overreaching government bureaucrats. But this is ridiculous.
* I haven’t actually done the calculations; if it’s not enough, just lower the exemption.
** They would also sue, but if the wealth tax were an act of Congress, I don’t think they’d have much of a case. Since we’re in fantasy land, we could pass the tax by an amendment to the Constitution. As law professors say, don’t fight the hypothetical.
*** And according to Ed Darrell, he probably did say something like that.
Update: And here’s Daniel Shaviro himself on the topic.