Springtime for Tax Deregulation

Like spring blossoms, stories about the failures of the U.S. income tax begin to sprout at this time of year.  President Obama’s blueprint represents only the latest attempt to address those problems using a playbook that is 25 years out of date.  Although the problem remains the same as in Reagan’s day (big corporations, high profits and tiny taxes) today the solution must be different. 

President Obama’s approach must be different because tax deregulation has given corporations extraordinary abilities, talents that some have exploited to reduce—and in some cases eliminate—their tax bills.  The same deregulatory impulse that provided bankers with the freedom to nearly destroy the global financial system now makes a mockery of the U.S. income tax.  How?  In some ways, it’s surprisingly simple.  For example, deregulation allows anyone to make a corporation disappear in the blink of an eye, leaving only what is known as a “tax nothing” behind.  As a result, corporations wield the sort of power one might expect from supervillains.

Neutralizing the impact of tax deregulation is not as simple as limiting the influence of lobbyists.  Nor will closing loopholes or changing tax rates bring taxpayers’ newfound powers under control.  To understand why, consider the case of Wal-Mart.  After years of playing the corporate bad guy, Wal-Mart recently found itself playing a (tax) victim.  Tax deregulation is to blame because it disproportionately benefits Wal-Mart’s more cosmopolitan peers.  A corporation like Wal-Mart that earns its income selling t-shirts and hardware to U.S. consumers gets left out.   

The tax rules governing multinationals used to be feared.  Those once-formidable laws served as potent guardians of the American tax system, ensuring that corporate taxpayers could not avoid U.S. tax by shifting income offshore.  Now, multinationals can avoid the reach of the U.S. income tax simply by making boxes disappear on a corporate chart.  Wal-Mart can only stand on the sidelines as others use the freedom deregulation has given them to artificially shift profits to more welcoming locales. 

Addressing this problem raises the fundamental question of whether any rule can withstand an assault by corporations able to achieve the tax-planning equivalent of leaping a tall building in a single bound.  Although all taxpayers would love to ignore inconvenient requirements, it isn’t clear that Congress should be in the business of granting superpowers to particular taxpayers (or that ordinary Americans should be forced to foot the bill when it does). 

In the 1980s, Reagan joined a bipartisan Congress by eliminating tax breaks and lowering corporate tax rates.  They achieved an extraordinary—but short-lived—victory.  For a time, corporations paid taxes consistent with their profitability and, no less important, non-corporate taxpayers.  Obama wants to do the same today, but old-fashioned loopholes are no longer the key problem.  In 1986, Obama might have been right to say that “a parade of lobbyists” had “rigged the tax code to benefit particular companies and industries” so that “those with accountants or lawyers to work the system” could “end up paying no taxes at all.”  Today—unless Wal-Mart has been abandoned by its lobbyists, accountants and lawyers—he is missing the point.