An Innovative Solution To Corporate Taxation: Stocks!

Dave Johnson

Dave Johnson Fellow, Campaign for America's Future

While we’re talking about taxes…

The Zero Hour with RJ Eskow recently spoke with economist Dean Baker, co-director of the Center for Economic and Policy Research, about “A New Way to Make Corporations Pay Their Fair Share.

 

The idea is, as Baker explains further in the LA Times, to make corporations give the government stock instead of taxes:

If the tax reformers are serious, and I hope they are, here’s one simple way to largely eliminate the gaming opportunities that have made these people rich.

Instead of traditional taxes, the government could require corporations to turn over a portion of their stock, say 25%, in the form of non-voting shares. The government would benefit from any dividends or share buybacks but would have no voice in running the company.

This system would eliminate almost all opportunities for gaming since a company would not be able to deny the government its share of profits unless it also withheld profits from its other shareholders. And we would not call that “tax avoidance” but outright theft – the sort of thing that gets people sent to jail.

This could fully replace taxation, because the government would collect dividends, and benefit when the value of shares rises with the profits of the corporation.

Corporate tax bureaucracies would become unnecessary, both within companies and in the government, and our democracy would receive revenue so it can do things to make our economy and lives better.

Why should the government (We the People) have a share of corporations? People generally do not understand what a corporation really is, and this common misunderstanding works to be benefit of those who make money off of them.

Corporations are entirely creations of government. They don’t exist without government. A corporation is a package of laws designed to accomplish a public purpose.

Individuals do not generally have the kind of capital available to accomplish large-scale projects like building a series of factories to make cars or airplanes. It’s also risky to sink one person’s life savings into a single venture, so event those with sufficient resources might not do it.

So government (We the People) created corporations as a way to pool capital and reduce individual risk. We, through our government, grant corporations the right to enter into contracts, write checks, hire people, borrow money, and file lawsuits as if they were a “person.”

A common misconception is that shareholders “own” corporations. They do not; shareholders do, however elect the Board of Directors, which hires people to manage the corporation according to the Board’s instructions.

People tend to think of and talk about corporations as sentient entities. But corporations do not think, decide, act or anything else. The managers of the corporation do that. For example, “Wells Fargo” did not “decide” to commit fraud against their customers, the corporation’s executives – people – did that.

Another common misconception is that corporations are required by law to do whatever they can to make profits for the shareholders. In fact this is a relatively recent concept that gained ground as people’s understanding of the purpose of corporations diminished.

In fact, government does much to limit what corporations can do while seeking profits. For instance, they aren’t supposed to kill or injure people, poison the air and water, or commit fraud in their pursuit of profits.

So the idea that government should keep their hands off of corporations and not hold some percent of them for the benefit of We the People is really preposterous. This thinking misunderstands what a corporation is, how and why it exists and what its true purpose is.

The goal of Baker’s idea is to create a system where corporations are paying their share to We the People, without all of the perverse incentives they currently have to avoid paying taxes. Baker’s idea would accomplish that goal.

Baker suggests that government hold 25 percent of a company’s of non-voting shares, but as the tax rate has already dropped from 52 to 46 percent under President Reagan to 35 percent today, and the corporate share of the overall tax burden has fallen from 32 to only 10 percent, perhaps an even higher share would be appropriate for restoring revenue and democracy.

Want to learn more about what corporations are and why they exist? See Lynn Stout’s The Shareholder Value Myth for a deeper dive into the topic.

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Reposted from Our Future.

Johnson also is a fellow at the Commonwealth Institute and a Senior Fellow at the Institute for the Renewal of the California Dream. Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson.

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