Sen. Elizabeth Warren is at it again. In a Medium post, Warren outlines a plan to impose what she calls a “real corporate profits” tax: a 7 percent surtax on all reported corporate profits over $100 million on top of whatever taxes corporations pay otherwise.
Many people more knowledgeable about taxes than I am will come up with any number of reasons why this is bad tax policy on its own merits. In fact, as I’ve argued before, the corporate income tax itself ought to be eliminated outright. But the higher taxes the plan proposes are only the tip of the iceberg; the plan’s additional features will cripple ordinary Americans’ ability to take part in the stock market while opening up huge opportunities for corporate corruption.
Let’s review Warren’s description of the plan first. She asserts that the current tax code is overflowing with “loopholes and exemptions” (never mind that many of them were just eliminated to lower the statutory rate) and that the biggest corporations disproportionately take advantage of them while leaving smaller, less-sophisticated competitors paying much more. Thus, under her plan, the “first $100 million is left alone” — meaning only taxes under the current code will apply — “but for every dollar of profit above $100 million, the corporation will pay a 7 percent tax.”
This may sound good at first blush, but the reality is much less rosy.
Since private companies don’t usually have to report their earnings, they would seldom have to pay the surtax in the terms Warren describes. Therefore, the simplest thing for a company not wanting to pay the tax to do would be to go private (or remain that way). Unfortunately, the number of public companies has been in a freefall for two decades, and IPOs are far less common than they were in the past. Under Warren’s plan, we could expect these numbers to drop even further. In fact, since the plan would effectively impose a huge tax on IPOs, it’s possible that going public will become too much trouble for anybody. Investing in all but the most stable and slow-growing companies would thus be limited to wealthy accredited investors and venture capital funds. A major way for ordinary Americans to build wealth would more or less vanish.
But this isn’t the worst part of the plan: The tax would also create an incentive for large, profitable companies to break themselves up into as many units as possible, thereby increasing opacity and, in turn, opportunities for corruption. All large companies consist of a profusion of legal entities reporting their results separately. Under Warren’s proposal, keeping each unit’s profits under $100 million would save a company huge amounts of money. (Warren claims that under her plan, Occidental Petroleum alone would pay $280 million more than it does now.) Thus, instead of using money to pay wages or dividends, or to fund additional investments, companies would divert funds to lobbyists and lawyers who could further divide the firm to ensure that no single unit received a profit over the $100-million threshold.
After making their structures incomprehensible to all but a few, companies would also stop issuing any type of consolidated report that might trigger the tax. Insurers and other financial institutions have long been allowed to share management and brands across groups while keeping capitalization separate, meaning it would likely be very difficult to force companies to issue these reports without significant economy-wide reverberations. With a huge incentive to make their books, management and operations as opaque as possible, nobody would be able to watch the watchers, meaning the opportunities for corporate corruption would multiply greatly. Whatever good tightened accounting and reporting standards under Sarbanes-Oxley have done would be undone in a flash.
Sen. Warren’s proposed corporate tax hike is not only a bad idea as a tax policy, it’s also a sloppy one that would have negative unintended consequences on a massive scale.
Image credit: Andrew Cline