Over the past several months, there have been numerous news stories about the government developing new methods of forcing people and corporations to pay taxes the way the government thinks they ought to be. We're hearing about Washington cracking down on tax havens and looking harder at how wealthy Americans pay their taxes. Just yesterday I wrote about how the IRS is making sure tax preparers aren't shady. Now, the New York Times reports that multinationals' taxes are being more closely scrutinized.
Why all the additional oversight? Because the Uncle Sam needs the money: when wealth is destroyed in a nasty recession, so is potential tax revenue. But given the economic turmoil, the government knows it can't raise taxes. But when you think about it, is there really any difference between collecting more taxes by: a) forcing people more closely follow the rules and b) just increasing tax rates?
First, a disclaimer: I wholeheartedly believe that individuals and firms should be following all tax laws prescribed, not only technically, but even in spirit. I'm an advocate for a much smaller government, and consequently much lower taxes, but I believe that the way to do that is through legislation -- not trying to scam the system. So anyone wanting to pay less in taxes should be
lobbying having a talk with lawmakers, not searching for tax loopholes that they can just barely contort their way through.
So I don't mean to look like I hold a lot of sympathy with would-be tax evaders. I don't. I think they should pay what they owe. But I also think timing matters.
For example, let's consider a section from the NY Times piece that I noted above. It says:
Companies like Microsoft and Google have long pushed their effective tax rates down by moving functions to lower-rate jurisdictions like Ireland, which has a low tax rate on royalty income -- as low as zero -- and a 12.5 percent corporate tax rate, against the 35 percent rate in the United States.
Now, it just so happens that I believe that this shouldn't be a considered loophole, but that the tax code should clearly state that multinationals can qualify for foreign earnings to be subject to the tax rates which apply in the nations where the business takes place. But let's pretend for a minute that this was a true loophole. Imagine if U.S. multinationals were taking advantage of the system and paying only 12.5% when they should be paying 35%. In whole numbers, if a company should be paying $35,000, it's instead only paying $12,500.
If you close the loophole, then aren't you just effectively raising taxes on these corporations or individuals? Of course you are. The difference is entirely semantic. At the end of the day, taking $22,500 more in taxes is what actually occurs, whether you call that a "tax increase" or "better oversight."
As a result, even though the government's heart is sort of in the right place in forcing people and corporations to pay what they really owe, the effect would still be just as negative on the economy as if it simply instituted an across-the-board tax increase to produce the same amount of revenue. As anyone who knows some basic economics can tell you, during a recession, or in the very early stages of recovery, a government isn't wise to raise taxes. And by increasing oversight, that's just what it's doing -- even if it sounds good to honest taxpayers. Tax evaders should get theirs, but justice could stand to be delayed for a year or two for the sake of everyone else.
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