Tax (Policy) Time

The call to reform corporate taxes is accelerating.

The Senate Finance Committee released a set of policy papers on tax reform today that at least include some ideas we like for discussion and inclusion, such as a carbon tax (more on that below). A few we’d like to see included and prioritized include:

1) Transparency: Make companies reveal how much they pay by making corporate returns (reports to the IRS) public. Currently, only listed (publicly traded) companies reveal what they pay — in 10-K annual reports filed with the SEC. But those figures are usually much different from what they actually pay.

As Mark W. Everson, IRS commissioner from 2003 to 2007 has suggested, “significantly increasing business transparency could immediately improve the way private-sector entities calibrate risk and deal with each other. A proper starting point is to make corporate tax returns available to the public, not just to the IRS.”

2) Close loopholes that allow companies to deduct payments for breaking the law.

As a 2009 Tax Notes article suggests — despite a Section 162(f) prohibition on deduction for “any fine or similar penalty paid to the government for the violation of any law” — companies have used the courts to open up loopholes (e.g. by claiming that the “purpose” of the law did not include state regulations).


After Enron and the 2003 corporate crime wave, Senators Grassley (R-IA), Baucus (D-MT) and McCain (R-AZ) introduced the Government Settlement Transparency Act, which would clearly closed the tax-deduction loophole for payments made to acknowledge actual or potential violations of any law.”   The legislation was never passed by Congress, which means that as a result the banks that nearly trashed the entire financial system in 2008 were potentially able to deduct a portion of the limited penalties meted out for their crimes.

3) Financial Transaction Tax (FTT) and Other Ways to Make Wall Street Pay Its Fair Share.

You pay a transaction tax every time you buy a cup of coffee. But stock traders and speculators pay a miniscule amount. A FTT would help shrink an overbuilt financial sector that takes a disproportionate share of profits out of the economy, while providing few real social benefits (as Paul Volcker famously pointed out, the financial services sector’s only significant innovation in the past couple of decades has been ATM machines).

One of the best ideas out there to slowly siphon money away from greedy speculators and put it back into the productive economy is to impose a modest financial transaction tax. See the Robin Hood Tax web site for more.

Another good idea is to close the so-called “carried interest” loophole that allows hedge funds, private equity firms and other banksters and investors to claim income as capital gains, allowing them to pay only 15% (or less) on investment income. As Warren Buffett has said over an over, it’s time to stop coddling the super-rich.

4) Make Polluters Pay: Enact a Carbon Tax

Rex Tillerson, CEO of Exxon, told the Council of Foreign Relations last year that the debate over climate change is over. The science is a reality. But then he said humanity could simply “adapt” to the consequences. Apart from how ludicrous and full of hybris this is, there’s another question: Who’s going to pay for the tens of billions of dollars that it costs us to respond and rebuild from each natural disaster? Who’s going to pay for the droughts (estimated to cost $20 billion in overall losses and $15-17 billion in insured losses in 2012 alone), hurricanes (Sandy was $50 billion, including $25 billion in insured losses), spread of infectious diseases, runaway wildfires, and investments needed to make our cities more resilient?

A carbon tax not only generates the needed revenues from the source of the problem, but as many (including the IMF, Brookings, and OECD) have suggested, it is probably the most effective policy option for addressing climate change, because it will send the most significant signal to the markets for a rapid shift in investment from fossil fuels to renewables and energy efficiency.  A recent OECD report comparing different national energy tax policies shows that higher energy tax rates result in the lowest carbon emissions on a per GDP basis (see page 59).  A good example of how this can work is British Columbia, which started with a modest $5/ton carbon tax in 2008, increasing gradually to  $30/ton in 2013 today.  The policy has sent a clear signal to markets and as Simon Upton, Director of OECD’s Environment Directorate pointed out at a recent energy finance conference sponsored by Bloomberg,  “no BC politicians are arguing to reduce carbon tax rates in the current election.” For more information about how a carbon tax could work here in the U.S. go here and here.


For other ways to close corporate tax loopholes and make them pay their fair share, see this report and other ideas collected by Citizens for Tax Justice.