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27 March 2011

Corporate Taxes and Corporate Mailboxes

Lesley Stahl of 60 Minutes reported tonight on "how U.S. corporations are cutting their tax bills by moving business overseas." Usually, I really like Ms. Stahl's reporting. This, however, was less critical than much of what she has done in the past. The basic framing of the segment is that because the U.S. government will soon have the highest corporate tax rates in the world, it is forcing companies to "move" abroad. That is but one way to think about what is going on.

First, corporations are by no means required to seek out the lowest tax haven. This is a choice that they make. Profit, by itself, does not have to be the ultimate motivation. Corporate citizenship seems to be a lost concept.

Second, many people would be angered, imagining a legal person denying his loyalty to his country simply to pay lower taxes. Why are we so ready to allow our corporations to be so utterly disloyal? Why don't we demand as much of them as we do of ourselves?

Third, the assumption put forward is that governments arbitrarily demand a percentage of a corporation's profits. This ignores the benefits that are enjoyed by corporations under those governments. Here is a list of just some of those benefits: international defense from foreign threats; domestic security from homegrown criminals; public infrastructure (e.g. roads, bridges, trains, and the interwebs) to move products, ideas, and people; an educated populace from which to draw employees; entitlements for the populace so that they can be healthy and happy consumers. All of these are public goods provided by governments that would otherwise have to be constructed by corporations.

Fourth, the (current lack of a) global system creates a race to the bottom. Imagine the last two remaining landlords in the world who are trying to convince the last remaining tenant in the world to sign the lease to live on their property. They go back and forth until one of them ultimately reaches a rent of 1¢ (or whatever the lowest payable denomination might be). In practice, the tenant lives virtually rent-free. If we ramp this up to real world complexity, we would end up with a handful of states "hosting" all of the world's corporations. Sadly, the only way to hedge this is with a fairly radical solution: a global corporate tax code--or at least the semblance of something like that. To say that this would be unpopular is probably the understatement of the year, but short of this, there is no way to force the social benefits of corporations to remain in the places that benefit those very corporations.

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