A long overdue reform to our tax laws


Wolf Richter reports on a proposal by Janet Yellen, President of the Federal Reserve.

Large corporations – and there are only a few dozen to which this would apply, according to the proposal – should pay income taxes on the inflated and puffed-up income they report to their shareholders under … GAAP [Generally Accepted Accounting Principles], rather than paying no taxes, or even getting paid tax benefits, on the losses they report separately to the IRS under the tax code.

Small corporations … use the same accounting principles for earnings and for taxes, or vice versa, and we have no illusions, and there is no reason to inflate income.

But Nike reported $4.1 billion in pre-tax income to its shareholders over the past three years and had a three-year effective tax rate of minus 18%, meaning the IRS paid Nike large amounts of money, the so-called “tax benefits,” instead of collecting taxes from Nike, according to a report by the Institute of Taxation and Policy. There were 55 companies of this type in the report.

. . .

If large corporations have to pay 15% minimum income tax on their profits as reported under GAAP, it could possibly bring some honesty and reality to financial reports because, under the 15% minimum tax on book income, companies that inflated and puffed up their income would have to pay 15% taxes on that inflated and puffed-up income. This would be a costly disincentive to inflate and puff up income.

It would make CFOs think twice. In theory, GAAP financial statements could become more honest, policed by the threat of having to pay 15% in taxes on puffed-up income. And that could be a game changer – when there are suddenly tax incentives to be realistic with financial reporting. And that’s why Wall Street will fight furiously to sink this thing.

There’s more at the link.

This is long overdue.  Big corporations have “bought” the tax code for decades, using lobbyists to pressure politicians to pass amendments that favor them at the expense of all other taxpayers.  That’s how most major corporations pay minimal or no tax on their billions of dollars in annual profits.  However, they all effectively use two sets of books:  one they present to their shareholders, usually showing very healthy profits, and the other that they send to the IRS, showing tax losses in every direction thanks to the convoluted intricacies of the tax code.

If corporations are forced to pay tax on their claimed profits, the Treasury will be much better off, and we as a nation will be able to afford a much better balanced budget.  However, as Richter points out, those corporations will kick and scream and protest to the heavens, and do their best to prevent such a tax from being implemented.  Will our politicians force them to pay up, or will they succumb (yet again) to corporate bribery in the form of “contributions to their re-election fund”?  Your guess is as good as mine . . . and mine’s not very hopeful.



  1. I wish everyone would be required to take a course in economics. It is impossible for a business to "pay" taxes. A tax is a business expense that is passed on to the people that buy their goods or services. If Nike is given tax breaks over, say, Reebok, that would be unfair business practices and should not be allowed. A business tax is said to be the politician's friend, since it can be passed on to the consumer indirectly.

  2. Oldvet has it mostly right. Tax incidence is primarily on the consumer, but also (to a lesser degree) on labour and (lastly and to an even lesser degree) on shareholders.

  3. Taxes on corporate income are the IQ test for politicians. If they think someone besides the customers pay the tax, they're morons. Any politician who says the customers aren't paying that tax need an economics class. Or truth serum.

    The only slight modification to the point about the customers paying the taxes has shown up in some studies: if the market is very crowded and prices are very inelastic because the competitors are from different countries without that corporate tax, the company's employees pay the corporation's taxes. Both the number of employees and their pay get hammered.

    Unlike the Federal Government, companies have a balance sheet that has to balance. As oldvet says, when a new cost comes along, it has to be offset by savings elsewhere. Either raise the price or cut the number of employees, their pay, close a building or something to cut costs.

  4. Businesses pay taxes, but the money comes from the consumer. Higher taxes? Higher prices for the consumer. It doesn't take a huge leap in intelligence to determine all increases in taxes are reflected in the pocket book of the consumer.

    The solution? Stop raising taxes to pay for inflation, pork, and personal gain by politicians. Make all payroll deductions illegal, and wait for the reaction of the tax bill on April 15th. Make the day after election day, and see how liberty returns.

  5. And all of this stupidity is why a Fair Tax or National Sales Tax is really necessary.

    But it won't happen, because futzing with the tax codes so that one's political patrons make out like bandits has been a time-honored tradition (and a way for the politician and bureaucrat to get rich, or their pets or family members to get rich because someone might actually question the politician and/or the bureaucrat getting rich) since taxes were first charged. Previously the money was on messing with import/export duties.

    Personally, I don't understand why we're paying Nike tax money to have their shoes made in slave camps and child-labor pools in Communist China.

    Which comes back to the Fair Tax or National Sales Tax Only argument. Do that, charge for purchases only with no other taxes and you'd see our tax intakes increase, well, until Congress sees another way to spend it.

  6. There are a lot of tax deductions for special purposes that the politicians want to push. These don't count as income or expenses for GAAP, but do count for tax purposes.

    depreciation of equipment and R&D are to huge ones (and R&D has been expanded to mean anyone doing software development so includes a huge amount of big tech labor costs)

    Yes, simplifying the tax code would be a huge in for the country (eliminating all the time and money spent on preparing taxes by itself would be a huge win) But nobody is willing to give up their particular exception.

    David Lang

  7. @Dave, there are good reasons to not do a straight consumption tax, it's very regressive and encourages complete vertical integration, making big companies much harder to compete with (small companies pay other companies to do stuff, each step gets taxed. But companies have different sets of employees do each step, with taxes only hitting at the final step)

    with any tax system, the hard policy issues come into play when you are dealing with people who don't actually get income, but instead who gain 'personal net worth' (i.e. value from ownership)

    This isn't just the uber rich, but anyone who owns a business (especially including small farmers).

    The problem is that the value that the person gets from ownership of something is theoretical until they sell it (the business could go bust, a natural disaster could destroy property), but everyone recognizes that the ownership has value and increase of that value is the equivalent of income for them.

    It gets worse when they then borrow money against the ownership and live on that money instead of selling a portion of the ownership.

    And all of this behavior is the absolute thing that you want to have happen for a farm where you get income once a year and the rest of the time you are living on savings or borrowing, but it can be abused if it's used as an end-run around taxes, so if we are going to have an income tax, then this needs to be taxes as well somehow.

    and if you are going to go with a consumption tax (to get back to the suggestion), how do you tax someone gaining ownership?

    David Lang

  8. (Sorry, edits)

    If we can't tax corporations (which point I used to wholly agree with, and now don't entirely disagree with, but have doubts) we can damned sure guarantee that they have to play by the same rules as the government that created them.

    Libertarians (I used to be one, in fact) insist that "private" corporations should be allowed to do whatever they want, essentially, because government control of business is bad. Bushwa. Government directly dictating how any given business operates, on a micro scale, is bad. But government control of business is not universally bad. I don't mind businesses being told that they can't dump their waste directly into a waterway, for instance.

    But even if we accept that premise, corporations are not, in any sense, "private" businesses. They are entities whose existence depends entirely on the government, and without the government they would fall into multiple smaller entities before you could say "Jack Robinson".

    If a small business wants to refuse entry to folks who haven't gotten "vaccinated" (for instance) that's fine. But if a multinational corporation -whose existence as an entity depends on the largesse of the government and citizens- wants to do the same, they can check if the government is allowed to do it, first.

    The same with banning speech. If you run your own, private forum, ban whatever speech you want. But if you're a multinational corporation, you'd better be sure that that speech isn't protected by the first amendment, because you're a government entity, subject to the same limitations.

    I know that's not libertarian, or business-friendly, but I don't care. Hell, it used to be a right-wing concept, and now it's largely associated with the left, because Republicans are spineless, feckless cucks. I know that's a dirty word these days, anathema to the National Review crowd, but it fits, which is why they hate it. They're spineless wimps, owned wholly by corporate interests who hate the people who frigging vote for them! Amazon despises Americans, unless they're the right color, gender (a linguistics term, but it's the language they use), sexual orientation, or nationality, but God forbid anyone suggest limiting their power to manipulate the political, social landscape, because they're huge, wealthy, and generous with their pocketbook. Etc.

    I'd prefer corporations be banned as a concept, but if not, there'd better be costs associated with the privilege of incorporation.

    If we can't tax them, we can sure as hell minimize their power.

    God bless.

  9. Janet Yellen is actually the U.S. Secretary of the Treasury, NOT the president of the Federal Reserve. That was her former job.

  10. @Bibliotheca

    how do you draw the line between the small business that can exclude whoever they want for any reason and the big business that can't do anything the government can't do?

    they are both created under the same legal conditions and in the eyes of the law are the same thing. One just happens to own another company in another country (and that doesn't exclude all small businesses)

    as for banning people who aren't vaccinated. It's been against the law for decades to demand private health information from people or to share such information (specifically including immunizations) so what right does anyone to find out if any other person has been immunized?

    why do people think that the rules that have applied to every other known virus don't apply to the Wu Flu? There is no other virus where people who have fought it off and developed antibodies are told that they need to get an immunization against it (historically, their blood is used to treat others, and even with the Wu Flu distillations of survivor's blood will help others, it just doesn't confer the same long-term immunity that the donor has developed)

  11. It would be a significant help to bring the Stock Reports within sight of reality. Sometimes, the simplest solution is the best.

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