False Tax Premises

Edward Kleinbard, a USC law professor, had some thoughts on tax inversions, the process whereby a domestic company merges into a foreign company and moves its headquarters to that foreign company’s domicile in order to avoid high domestic taxes. The subject has come up in the last few weeks in the context of US companies doing the inversions. Dr Kleinbard, though, is proceeding from some false premises.

He argues, for instance,

Firms that invert argue that the deals are…harmless to US tax-revenue collection, and a necessary response to our anticompetitive world-wide corporate tax system. [“Harmless” is] demonstrably false…..

If allowed to continue, inversions will eviscerate the US domestic corporate tax base, because making a foreign company the parent of a US firm opens up new tax-avoidance possibilities.

The false premise is this. It isn’t the government’s money; it’s the money of the corporation’s owners. It simply isn’t possible for the government to be harmed by not receiving that which doesn’t belong to it.

Moreover, there shouldn’t be a “US domestic corporate tax base” in the first place. The corporation really doesn’t pay much of those taxes; the corporation’s customers do in the form of higher prices—which ultimately makes the American citizens doubly taxed.

Another of Kleinbard’s false premises is this:

Corporate tax reform will not be able to undo the damage done to the US tax base.

Part of this second error is simply a restatement of the first: no damage can be done to the government’s tax base by not receiving that which doesn’t belong to the government.

The larger question here, though, is the predicted failure of corporate tax reform. With American corporate tax rates lower than anywhere else in the world (their complete removal, say I) the US will be far more attractive to all companies, foreign and domestic. Including to those inverted companies, still inverted, or with the inversions undone as the more attractive alternative for the putative new senior partner company.

Besides, in the end, as always, the government doesn’t need the money; it needs to reduce spending.

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