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On second thought, maybe George Will has a point...
We've been reading in recent days snippets from the Paradise Papers (and, last year, from the Panama Papers) showing how corporations and extremely wealthy individuals shelter their assets and income in low-tax-rate jurisdictions. And at least one article I read on the subject pointed out that while many of the individual tax dodges were illegal, most of the corporate tax dodges were completely legal.
If you were designing a rational tax system (individual or corporate), one of your criteria would be that it not make the economy as a whole terribly inefficient. Free-market economics is supposed to be about efficiency, and the theory that a bunch of independent businesspeople, making local decisions in their individual best interest, produce a global effect that is (close to) a global optimum.
A number of things can go wrong with this theory, of course. One is rent-seeking. Economists, by and large, like and respect expenditures that have the effect of increasing society's total wealth, while abhorring expenditures to be the one who gets a revenue stream ("rent") that exists regardless of your expenditure, i.e. to increase one's own share of wealth without producing any benefit to the total. Spend your money building a factory so your workers can produce more goods and services -- great! Spend the same moneybribing lobbying government officials to be the one who gets a profitable government contract rather than another company that might actually do the job better -- not so great. Spend the same money hiring thugs to prevent your workers from unionizing so you can keep your profits up at the expense of their wages -- not so great. Spend the same money setting up shell corporations in the Bahamas that own shell corporations in Ireland that bought your intellectual property at artificially low prices so they can license it back to you at artificially high prices so it looks like your parent company has no profits and the Irish company, subject to lower tax rates, has huge profits -- a pure waste of total resources, just so you pay a smaller share of the world's tax burden. (And yes, although that example comes from Apple, I gather that my own high-tech employer, like most multi-national corporations, has made use of similar schemes.)
Similarly, an individual who reclassifies his/her income from personal income to pass-through business income in order to get a lower tax rate hasn't improved the productivity of the business a jot, only decreased his/her own share of the global tax burden at everyone else's expense. Indeed, the act of shifting money around from one form to another, or from one tax year to another, usually costs something itself, thus making the overall system actually less efficient. The entire industry of tax consultants lives on rent-seeking; the global economy would be better off without it, while each individual large taxpayer is much better off with it.
So a sensible, globally efficient individual tax system would say "income is income". I don't care whether you got it as wages, or interest, or dividends, or rent, or royalties, or gifts, or short-term capital gains, or long-term capital gains, or inheritance -- it's your income, and you're taxed on the total, so your only incentive to shift assets or income from one category to another is to make them more productive. (Some of these forms of income, like inheritance, are highly variable from year to year, and I could see a justification for smoothing your taxes over several years, as long as you're taxed on the total in the long run.) Which sorta works for individuals whose finances are largely within one tax jurisdiction, but it's trickier for individuals with global finances, and still trickier for big corporations with global finances.
Ideally, we'd like a global system in which people aren't incentivized to shift their assets or income from one place to another just to avoid taxes. Here we can leverage the fact that actual human persons are in one geographic location at any given time: even if you have a home in New York, a home in rural Idaho, and a home in the Bahamas, most of your income and expenditures will actually take place in one of those places, when you are in one of those places, and can be taxed accordingly. If you want to pay most of your taxes at Bahamian rates, it means spending most of your time physically in the Bahamas (which is not so bad, unless you want to see a Broadway show). The guy who sets up half a dozen shell corporations in order to hide his consulting fees in Cyprus is still violating U.S. tax law as soon as he withdraws money from that Cyprus account, in the U.S. where he lives and works, without reporting it to the IRS. There are lots of difficulties that I haven't thought through, but it's a starting point.
Things are even trickier for corporations, because they don't have physical existence or a geographic location; as we've seen, they can and do declare themselves, their profits and assets to be wherever they'll pay the least taxes. Which leads to the George Will quote "the Republican plan's [20%] business tax rate is 20 points too high." Suppose there were no corporate income taxes whatsoever, and income were taxed only when it came into the possession of an individual with a physical body, and then at that individual's tax rate. What would this imply? Well, a lot of money sloshing around from corporation to corporation to corporation, tax-free... but it's not entirely obvious that this is bad, as long as all the income actually gets taxed when it lands in a human's hands. There would be lots of dodges to make individual income look corporate: employers would have an incentive to give their employees free food, free housing, free travel, free use of company vehicles, etc. in lieu of taxable wages. What else would go wrong? Discuss.
If you were designing a rational tax system (individual or corporate), one of your criteria would be that it not make the economy as a whole terribly inefficient. Free-market economics is supposed to be about efficiency, and the theory that a bunch of independent businesspeople, making local decisions in their individual best interest, produce a global effect that is (close to) a global optimum.
A number of things can go wrong with this theory, of course. One is rent-seeking. Economists, by and large, like and respect expenditures that have the effect of increasing society's total wealth, while abhorring expenditures to be the one who gets a revenue stream ("rent") that exists regardless of your expenditure, i.e. to increase one's own share of wealth without producing any benefit to the total. Spend your money building a factory so your workers can produce more goods and services -- great! Spend the same money
Similarly, an individual who reclassifies his/her income from personal income to pass-through business income in order to get a lower tax rate hasn't improved the productivity of the business a jot, only decreased his/her own share of the global tax burden at everyone else's expense. Indeed, the act of shifting money around from one form to another, or from one tax year to another, usually costs something itself, thus making the overall system actually less efficient. The entire industry of tax consultants lives on rent-seeking; the global economy would be better off without it, while each individual large taxpayer is much better off with it.
So a sensible, globally efficient individual tax system would say "income is income". I don't care whether you got it as wages, or interest, or dividends, or rent, or royalties, or gifts, or short-term capital gains, or long-term capital gains, or inheritance -- it's your income, and you're taxed on the total, so your only incentive to shift assets or income from one category to another is to make them more productive. (Some of these forms of income, like inheritance, are highly variable from year to year, and I could see a justification for smoothing your taxes over several years, as long as you're taxed on the total in the long run.) Which sorta works for individuals whose finances are largely within one tax jurisdiction, but it's trickier for individuals with global finances, and still trickier for big corporations with global finances.
Ideally, we'd like a global system in which people aren't incentivized to shift their assets or income from one place to another just to avoid taxes. Here we can leverage the fact that actual human persons are in one geographic location at any given time: even if you have a home in New York, a home in rural Idaho, and a home in the Bahamas, most of your income and expenditures will actually take place in one of those places, when you are in one of those places, and can be taxed accordingly. If you want to pay most of your taxes at Bahamian rates, it means spending most of your time physically in the Bahamas (which is not so bad, unless you want to see a Broadway show). The guy who sets up half a dozen shell corporations in order to hide his consulting fees in Cyprus is still violating U.S. tax law as soon as he withdraws money from that Cyprus account, in the U.S. where he lives and works, without reporting it to the IRS. There are lots of difficulties that I haven't thought through, but it's a starting point.
Things are even trickier for corporations, because they don't have physical existence or a geographic location; as we've seen, they can and do declare themselves, their profits and assets to be wherever they'll pay the least taxes. Which leads to the George Will quote "the Republican plan's [20%] business tax rate is 20 points too high." Suppose there were no corporate income taxes whatsoever, and income were taxed only when it came into the possession of an individual with a physical body, and then at that individual's tax rate. What would this imply? Well, a lot of money sloshing around from corporation to corporation to corporation, tax-free... but it's not entirely obvious that this is bad, as long as all the income actually gets taxed when it lands in a human's hands. There would be lots of dodges to make individual income look corporate: employers would have an incentive to give their employees free food, free housing, free travel, free use of company vehicles, etc. in lieu of taxable wages. What else would go wrong? Discuss.