7 Things Corporations will Do Before Paying Taxes
It is foolish and counterproductive to tax corporations. Because corporations are driven by economic principles, rather than political ones, they will go to great lengths to avoid taxes. Here are a list of things corporations would usually rather do than pay taxes:
- Pay higher salaries to corporate executives and employees.
- Advertise more, even if advertising is poorly targeted.
- Build new expensive buildings.
- Sponsor corporate parties, golf trips, and buy luxury items.
- Hire batteries of lawyers to find tax loopholes.
- Hire corporate lobbyists to create tax loopholes.
- Move corporate headquarters or operations to another country.
All of these behaviors are a result of natural economic responses to present government policies. In my opinion legislators are directly to be blamed for corporate tax avoidance. Causing corporations to engage in the above behaviors is poor government policy. Rather, if governments understood economic principles, instead of committing the sin of envy, they would enact policies that tapped completed economic activity not the production process.
Why the U.S. Tax System is not Globally Competitive
The United States has an antiquated tax system that makes it less competitive with other countries that base taxes on economic principles. In a global economy, if a government taxes labor (income tax and Social Security), taxes corporate profits, or taxes the raw materials or components that go into production (VAT), the price of a product goes up. If another country has a lower tax rate than the United States in any of these areas, then even if wages were equal, the other country’s products would cost less on the global market because the cost of production would be less.
Tax the Fruits, not the Seeds
The U.S. Tax system can be compared to an envious tyrant that takes a portion of a farmer’s seeds before they are planted, rather than encouraging the farmer to plant the seeds and generate a hundred-fold increase. If the tyrant waited he could take ten percent of the yield and the farmer could still have nine times more to sell.
Sales taxes on the products create a level playing field because both Chinese and American products would be taxed at the same rate. This would enable equal opportunity and fair competition. However, the U.S. tax system as it exists penalizes production and forces jobs to go overseas.
Tax Passive Profits, not Labor
It is a sound economic principle that people should be entitled to the fruits of their labor. It is not as sound to say one is entitled to the fruits of another person’s labor. The U.S. Tax system taxes the workers (labor) that make products, but it often taxes corporate dividends and other forms of profit redistribution at a lower rate. While corporate executive pay is taxed on the same system as labor, the amount of pay above the hourly work actually put in can be classified the same as passive investment. This is why is is not unjust for President Obama to seek taxes on incomes over $250,000. Such incomes are generally not the product of one’s own labor, but as a form of redistribution of profit for purposes of corporate tax avoidance.
Making a System that Works
Thus, for a tax system to be both just and competitive it should:
- Not tax hourly wages.
- Only tax personal incomes above the value of labor (say $250,000). This would really be a tax on corporate profits, royalties, and stardom (national athletes, movies stars, media stars, etc.)
- Not tax corporations.
- Tax after-production money taken out of the corporations (stock dividends, profit-sharing bonuses to employees, and high executive salaries).
- Enact sales taxes that tax goods made in all countries the same.