Corporate Tax Reform Is Needed, But Not Trump’s Proposal
Dean Baker of CEPR argues that a better corporate tax reform would be to have the government hold a portion of corporations’ shares and earn their dividends instead of taxing them
KIM BROWN: Welcome to The Real News Network. I’m Kim Brown in Baltimore.
Part of Donald Trump’s ambitious agenda as president of the United States, in addition to repealing and replacing Obamacare and stopping ISIS in the Middle East, he also wants to reform the Tax Code. Here’s Candidate Trump last year speaking about his tax plan in Detroit.
DONALD TRUMP: Under my plan no American company will pay more than 15% of their business income in taxes. My running mate, Mike Pence — and, by the way, a great guy — signed…
CROWD: (cheers, applause)
DONALD TRUMP: …signed a similar order when it came, and became, and when he worked so hard, in Indiana as its governor. This will give our American companies the certainty they need to reinvest in our community. Get cash off of the sidelines, start hiring new jobs, and expanding their businesses. So, important. That’s what it’s about.
KIM BROWN: The order Donald Trump was speaking of right there, that Mike Pence signed while governor of Indiana, has to do with repealing regulations on corporations. Something that Donald Trump says stymies economic growth.
But is Trump’s proposed tax plan, is it going to just reshuffle the tax code into something even more friendlier for corporations and the wealthy?
Well, a new op-ed in the LA Times this week gives some guidance as to what direction this country’s tax decisions should go. And we’re joined today with the author Dean Baker, is the co-director of the Center for Economic and Policy Research. And his op-ed is titled Instead of Taxes, Make Corporations Give the Government Stock. And he joins us today from Washington, D.C.
Dean, thank you so much for being here.
DEAN BAKER: Thanks for having me on.
KIM BROWN: In your piece, you explain about how much revenue is lost from corporations gaming the system. Give us an example of this, and the type of thing, in your opinion, do you think this is the type of thing Donald Trump wants to correct?
DEAN BAKER: Well, first off, let me back up a step, and just make a point very clearly. The corporate tax to my mind is in much worse shape than the individual income tax. So, when people talk about tax reform, to my view, there’s a story as to why you might want to deal with the corporate income tax. There isn’t much with the individual income tax. It can always be made better, but basically the individual income tax does what I think most people want it to do – wealthy people do pay more. Maybe they can pay still more yet. But that is the basic story.
Corporate income tax, we have a high tax rate — 35%. Almost no one pays that. The average tax rate is somewhere around 22%, 23%. That means, one, we’re losing a lot of revenue. We’re not getting the revenue we expect, but the other part, perhaps even more importantly; you’ve created this huge tax avoidance industry. And that was the context in which I was making this proposal, because we don’t want people to get rich figuring out ways to avoid the income tax. That’s just basically the government handing them money. I can’t imagine why we would want to do that.
So, we badly need reform of the corporate income tax. And the proposal I was suggesting was saying, okay; let’s pick a number. I was suggesting 25%, which would mean somewhat of a tax increase, if we actually got that. But we say, okay, give us 25% of your shares – not voting stock.
So, I’m not telling people we’ll have the government take over the companies, quite the opposite. We have non-voting stock, no claim to tell them where they should invest, what they should do. But the point is you give $2 dividend to your regular shares, you give $2 dividend to the government shares. If you buy back 10% of the regular shares at $100, you buy back 10% of the government shares at $100. Whatever you give to your regular shareholders you’re giving to the government, pretty hard to get around that.
So, to my view, that’s what we should be looking to do with tax reform. Probably not the president’s view.
KIM BROWN: How does this differ? I mean, I’m sure it differs quite a bit from, say, the big bailout of Detroit that happened under the Obama administration, where the government provided this money to keep the auto industry afloat. And that money was subsequently repaid and the companies that were the prime beneficiaries from that, at least in the short term, afterwards, did fairly well in recovering. So, how does this line up with what you’re suggesting?
DEAN BAKER: Well, it is the same sort of principle. So, the government wasn’t trying to take control of General Motors. It was trying to get a stake, saying, okay, we’re giving you money to get through this tough time — they actually did go into bankruptcy — but, as part of our payback, when things improve for you, we want a share in those gains.
And it did that with General Motors, did the same thing with AIG. Now it was a little more complex because those were warrants. They weren’t actually shares. But the point was it was the same basic principal that what you give to your shareholders you’re going to give to us.
That’s a good precedent, and it just seems to me. Let’s carry that further. So, this isn’t an alien concept, we’ve done it in different contexts, and again, people could argue, you know, we want the government to have more control, and we do want regulations certainly. Those are arguable points. But that’s not what I’m saying here.
I’m just saying we want a claim to the company’s profits, and this is a way you could do it that is really pretty hard to see how they can get away from.
KIM BROWN: How would that change things from how they are currently? I mean, what would that provide for the average taxpayer, and for government tax coffers?
DEAN BAKER: Well, basically… well, two things. One is, it gives us an assurance we’re going to get the revenue that we expect from corporate America. So, if we’re expecting to get 2.5% of GDP in corporate income tax, somewhere around what we’re getting, we could pretty well lock that in. I mean, if companies have a bad year, I mean, obviously, we won’t get that. That’s the way it will always work. Nothing you can do about that. But we could be pretty well assured of getting what we’re supposed to.
But the other part is, we put the tax avoidance industry out of business. And this is a major source of inequality in the country. This is really under-appreciated. If you look at the tax avoidance industry — you have things like private equity, Mitt Romney, Pete Peterson, a lot of the richest people in the country — they make their money largely on tax avoidance. That’s not doing anyone any good. It’s making people very rich at the expense of the rest of us.
In Michael Moore’s great movie Capitalism: A Love Story, he had this story about dead peasant insurance policies — this is very morbid. These are policies that Walmart might take out on its — I shouldn’t say Walmart might. They did actually do this. They take out these policies on the retail clerks, and Walmart would be the beneficiary of the policies. Most people won’t even know that the policy was taken out in their name. And if they do this way, say, 30,000 clerks, they know how old they are, they’re in their 40s, and such a such a percent will die each year.
So, this was a way for them in effect to game the tax system. They were able to defer taxes because the insurance policy was deductible. When the people died, and they collected, then they would have to pay tax on it. Well, someone I’m sure got very rich designing dead peasant insurance policies.
That did not help the economy; they weren’t contributing to economic growth, to making society better. We don’t want to see people getting rich that way. So, if you eliminate tax schemes like that, to my mind, that’s a big benefit.
KIM BROWN: Let’s hear another clip from Donald Trump — Candidate Trump at the time — speaking to the Detroit Economic Club in a similar speech that we saw clips from earlier.
DONALD TRUMP: As part of this reform, we will eliminate the carried interest deduction — a well-known deduction — and other special interest loopholes that have been so good for Wall Street investors, and for people like me, but unfair to American workers. Tax simplification will be a major feature of the plan.
KIM BROWN: Dean, in your piece you do talk about tax avoidance and how this is a pretty big industry within itself. And Donald Trump has self-congratulated himself numerous times for, quote, “being smart” for avoiding his federal tax obligations. So, how can we counter this appearance, or this narrative, rather, of either the extremely wealthy corporation, or the wealthy individual, not being unpatriotic for not paying their fair share?
DEAN BAKER: Well, first off, I mean, one of the things that would be nice to know is what actually are his tax returns? I mean, every presidential candidate for decades, has made their tax returns public.
And, of course, President Trump has made a point of saying, well, during the campaign, he said he would do it once his audit was completed. We don’t know if he was actually being audited, but he claimed he was. Well, one of these days, his audit should be completed, and if he were committed to his promise, he would be releasing his tax return. So, we should see those.
But, you know, the other point, I guess I’m a little half-sympathetic to, if you put money on the table — I’m a little hard-pressed to blame people too much for taking it. You know, Warren Buffet has often made the quip that he pays a lower tax rate than his secretary because most of his income is capital gains income, and that’s taxed at a lower rate.
That’s taxed at 20%, whereas someone who’s middle income is paying a 25% tax rate. I don’t particularly blame Warren Buffet for paying the capital gains tax. I blame us for having a tax code that allows him to pay a very low rate.
I don’t get too upset about him taking breaks that are actually there. I mean, he did so legally, but I don’t want to see those breaks.
KIM BROWN: Indeed. Well, if you’re looking for the piece, it’s in the LA Times this week. It’s titled Instead of Taxes, Make Corporations Give the Government Stock. and we’ve been speaking with the author, Dean Baker. He is the co-director of the Center for Economic and Policy Research. Dean, we appreciate you joining us. Thank you.
DEAN BAKER: Thanks a lot for having me on.
KIM BROWN: And thanks for watching The Real News Network.