Cracking Down on Corporate Tax Scams

With the country in the middle of a needless war and Trump making plans to end democracy, it seems a bit of a sidetrack to be talking about corporate tax policy, but sometimes we need a diversion. And the Trump sleaze is getting so extreme, it deserves some comment.

The latest are plans by the administration to greenlight a series of tax avoidance strategies that will cost an estimated $100 billion in revenue over the next decade. To be clear, this is not big bucks in terms of the federal budget. It is a bit more than 0.1 percent of projected expenditures over the next decade, but the scams raise the bigger issue of corporate tax avoidance/evasion.

The legislated corporate tax rate is 21%. In the first three quarters of 2025 (the period for which we have data), corporations paid 19.4% of their profits in taxes. The gap between the legislated rate and what they paid came to roughly $50 billion at annual rate for last year, or five times the size of the avoidance issues highlighted in the Washington Post piece.

And the problem is likely much larger. The Biden administration had actively tried to crack down on corporate tax avoidance. The tax share of corporate profits had fallen as low as 15.3% in 2018. It’s likely that the tax share will be headed downward with the Trump administration again controlling rulemaking and enforcement at the I.R.S. It’s also worth noting that some avoidance takes the form of companies that are effectively corporations, instead operating as partnerships, which don’t pay the corporate income tax at all.

There is actually an incredibly easy fix to corporate tax avoidance. We can simply require companies to give the government a percentage of non-voting shares, equal to the targeted corporate tax rates. This means if we want a 25% tax rate, then we require all corporations to turn over non-voting shares that are equal to 25% of their total shares.

These shares would be treated just like any other shares, apart from voting privileges. If the company pays a dividend of $5 a share, then each of the government shares get a $5 dividend. If it buys back 5% of its shares at $100 a share, then it buys back 5% of the government’s shares at $100 a share.

The neat aspect of this approach is that the only way companies can cheat the government is if they also cheat their shareholders, which would get some very rich people very angry. This not only gets the government the tax revenue it is targeting; it also puts the parasitic tax-gaming industry out of business.

Currently thousands of tax lawyers and accountants earn big bucks developing tax scams that allow corporations to avoid paying taxes. If companies are required to instead hand over non-voting shares to the government, these people would have to do honest work for a living; a big victory for economic efficiency.

Partnerships raise another set of issues. Partnerships do not pay income tax. Their profit goes back to the partners, who are then responsible for paying individual income taxes on the money. Until the 1950s, partnerships generally did not have limited liability like corporations, which meant that the individual partners were fully responsible for any liabilities of the partnership if it went bankrupt.

There was effectively a quid pro quo. If a company wanted the benefit of limited liability, and other benefits of corporate status, it had to pay the corporate income tax. However, this has largely broken down as it has become increasingly common for partnerships to gain limited liability, even without paying the corporate income tax.

There is little rationale for separating limited liability status from the corporate income tax. Obviously, partnerships would prefer limited liability without having to pay the corporate income tax, but there is no reason to design the tax code around the preferences of partnerships. Many partners in private equity companies, hedge funds, and real estate investment trusts are among the richest people in the country. They don’t need special treatment.

This reflects a larger problem with designing the tax code. Many corporations have adopted complicated accounting practices, largely to avoid taxes, but sometimes for other dubious purposes. They then demand Congress and/or the I.R.S. adjust tax law to accommodate these practices.

This is 180 degrees opposite of the way tax law should work. It is the responsibility of companies to accommodate themselves to the law, not the other way around. If there is a provision in the law that really does impede normal business practices, then it should be changed. But it doesn’t make sense to adjust the law to make it easier to avoid taxes or get around other laws.

Allowing partnerships to get limited liability without paying the corporate income tax is perhaps the most extreme example of this sort of accommodation, but it is a far more general problem. The point of the corporate income tax is to raise revenue from corporations, not to provide a playground for clever tax lawyers and accountants.

The issue with increasing the amount of revenue from business tax is the political will to impose higher taxes on politically powerful groups, not any technical obstacles to having an enforceable tax code.

This first appeared on Dean Baker’s Beat the Press blog.

The post Cracking Down on Corporate Tax Scams appeared first on CounterPunch.org.