Paul Krugman Lays Bare Latest Corporate Scheme to Rob American Taxpayers

It's called 'inversion,' and Congress could close this outrageous loophole right now.

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If corporations are people, as the Supreme Court says, then why don't they have to pay taxes? Paul Krugman expresses outrage about the latest corporate scheme to dodge taxes in today's New York Times column

Admittedly, corporations do still pay some taxes. "The federal government still gets a tenth of its revenue from corporate profits taxation," the Nobel-prize winning economist writes. "But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s, a quarter or more well into the 1960s. Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent."

The latest of these aggressive tax-avoidance ploys is called “inversion.” And as Krugman explains, it's a purely legal maneuver that allows companies to claim that its "U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate."

The company does not need to move overseas to do this. What a quaint and old-fashioned notion. It's all done on paper. Sometimes, it might involve opening an office somewhere abroad. The most egregious current example is Walgreen, which will continue to operate its thriving pharmacy business in the U.S. (have no fear, your local Walgreen's will remain) but for purely tax reasons, is reportedly about to declare itself Swiss, which "will deprive the U.S. government of several billion dollars in revenue that you, the taxpayer, will have to make up one way or another," Krugman writes.

That's what we have legislatures for, right? To rein in these corporate bad actors. Congress could rather easily crack down on this tax dodge. Why doesn't it?

Krugman:

Opponents of a crackdown on inversion typically argue that instead of closing loopholes we should reform the whole system by which we tax profits, and maybe stop taxing profits altogether. They also tend to argue that taxing corporate profits hurts investment and job creation. But these are very bad arguments against ending the practice of inversion.

First of all, there are some good reasons to tax profits. In general, U.S. taxes favor unearned income from capital over earned income from wages; the corporate tax helps redress this imbalance. We could, in principle, maintain taxes on unearned income if we offset cuts in corporate taxes with substantially higher tax rates on income from capital gains and dividends — but this would be an imperfect fix, and in any case, given the state of our politics, this just isn’t going to happen. 
 
Furthermore, ending profits taxation would greatly increase the power of corporate executives. Is this really something we want to do?

Easy question, we know.

Yes, yes, yes, Krugman writes, the system should be reformed. But that does not appear to be happening any time soon, given the current obstructionist posse in the Republican-controlled House. We can't wait for that to get Walgreen's and its like to pay their share.