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RE-THINKING MONEY, RELIGION & POLITICS

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Aaron Hedges

Better Taxes, Part 2: Simplify, Simplify, Simplify

We don’t expect corporate entities to govern themselves and broader economics in the best interests of the overall public without any public oversight, so we necessarily have to deal with public policy via government. We hearken back to Adam Smith’s view that governments are “to promote the happiness of those who live under them. This is their sole use and end.”


Happily, our first recommendation on policy is to keep it brief. This does not mean that less regulation is always better but that necessary regulation should be stated in brief form to make it as understandable, actionable, and enforceable as possible. Regulation that is not concise and clear is actually counterproductive. Simple rules are easy to interpret, implement, and enforce, bringing consistent and manageable standards to all involved. The

more complex rules are, the more resource-intensive they are to comply with, creating a burden for smaller firms and therefore an advantage for firms that are already the largest and most advantaged.


Photo Credit: thequotes.in



It is not out of ignorance that Facebook executives are saying they would be okay with, or even welcome, regulation as they face scrutiny. They have no love for regulation in and of itself, but they know they are better equipped to handle regulation than any competitor or potential competitor, so any burden created by regulation would be proportionally more

burdensome on their competitors or new entrants. This kind of “regulation” would only further Facebook’s existing advantages and create a barrier to entry for new challengers.


Some will argue that simple policies will have unintended consequences; they are like blunt instruments where more nuance is needed. We do not disagree that simple policies may have unintended consequences, some of which may be undesirable. We submit, however, that the unintended consequences of long, dense, and complex policies are even worse. Better to have

a simple policy that holds all players in a given field to the same standard in a relatively non-burdensome way than convoluted policies that big players can afford to manipulate while smaller players bear a disproportionate burden. In this way, simple policies would have the consequence of far less regulatory burden. We view simplicity as the more profitable and sustainable route for all stakeholders, in keeping with our Partnership Ethic.


For example, in a simple sense, beginning in 2018 America’s federal corporate tax rate is 21 percent. A printed version of the Internal Revenue Code, though, has 5,296 pages. But wait, there’s more. According to the IRS.gov website, “Treasury regulations (26 C.F.R.)—commonly referred to as federal tax regulations—pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury.” A printed version of the Treasury regulations has 14,260 pages.


Massive companies can pay an army of lawyers, accountants, and lobbyists to scour all of those 19,000 pages and find (or create) ways (loopholes) to lower their taxes, and the expense they pay that army is less than what they save in taxes. When we say they can, we mean they do. In 2018, 379 of America’s Fortune 500 companies were profitable, and together they paid an effective federal income tax rate of 11.3 percent. Ninety-one corporations paid federal income tax of 0 percent or less on their U.S. income, including

names like Amazon, Chevron, FedEx, General Motors, Halliburton, IBM, Netflix, Nvidia, Salesforce, and Starbucks. These ninety-one corporations collectively made $101 billion in profit and received payment from the IRS of $6 billion!


A small business cannot pay an army of tax experts, so it simply pays the 21 percent headline rate. The upshot is that small businesses, with fewer resources, contribute a higher effective tax rate of 21 percent to public revenue while the largest businesses, with the most resources, contribute much less.


This imbalance places an undue burden on smaller businesses, not to mention individual taxpayers, to meet America’s revenue needs, while creating an unfair advantage for those entities already most advantaged. It also diverts large amounts of time, energy, and money away from innovative and productive endeavors that add value to the economy (see Relentless Rule 3) into tax management schemes that sap value through friction-laden transfers (see Relentless Rule 2).


We propose reducing America’s federal corporate income tax rate to 16.8 percent (one fifth lower than the current 21 percent) and removing the loopholes—all of them. What if the corporate tax code could fit on a single page? Who says no, other than the armies of tax experts and the companies that employ them at the expense of public revenue?


Call us naive if you have to resort to ad hominem attacks. Call this action item extreme if you must. (Or is the current reality—a tax code of 5,296 pages and official explanation of 14,260 pages—the real extreme?) This is basic and actionable, and that is the intent. For those who have more sophisticated approaches that are also actionable, we welcome the dialogue. For those vested interests in the status quo that oppose making taxation both simpler and at a lower rate, we invite that public dialogue too. Truly we would be intrigued to hear from any company a public statement as to why it prefers higher, complex taxes to lower, simpler ones.


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