Corporate Income Tax: We Tried the Stick, How About the Carrot?

Abstract

Due to their ongoing focus on tax planning and continuous efforts to find new tax minimization strategies, multinational corporations have not been paying their fair share of taxes for a long time. As a result, the federal government is unable to generate much revenue through taxes levied on corporations. The government’s response to this problem has always been the same: introduce new tax laws and regulations, revise old tax laws to close “loopholes,” and hope that this will solve corporate tax evasion. For decades, this approach has failed. This Article examines the history of the corporate income tax in the United States and the parallel evolution of an industry dedicated to helping corporations avoid those taxes. This Article finds that the development of this industry has had significant influence on the federal government’s decisions with respect to how it taxes corporations, usually opting to adopt anti-abuse, -avoidance rules in an effort to crack down on perceived bad actors. These policy choices, though, have had little success over the years. Instead, tax revenue generated from large-scale corporate groups has been modest, and there appears to be a consensus that these entities don’t pay their fair share. We propose a different course. Instead of anti-abuse and -avoidance rules, the tax code should use tax and other economic incentives to encourage entrepreneurs and corporations to invest in the domestic economy. Economic activity creates positive externalities in the domestic economy specifically and United States generally. Congress should amend the tax code to better allocate the proceeds of these positive externalities between the Internal Revenue Service, corporations, and stakeholders. Since the Internal Revenue Code for corporations was enacted in 1909, Congress has attempted to block abusive tax planning. However, its chosen method–deterrence– has had little positive impact on the U.S. economy. In many instances, deterrence has even had a negative impact, encouraging corporations to shutter their U.S. plants and dismiss hundreds of thousands of American employees in favor of foreign operations. Such legislative measures have “trapped” billions of dollars overseas by making the distribution of these profits to U.S. shareholders too costly. Instead, Congress should adopt tax incentives that balance the positive externalities of economic activity on local communities with the need to protect small- and medium-sized businesses’ ability to compete with the entities that will be most advantaged by these favorable incentives. This approach would reduce the advantages built-in to existing complex corporate structures that enable the largest corporations to easily shift revenue and profits to lower-tax jurisdictions. This approach, however, does not jeopardize recent attempts to set a global minimum tax aimed at reducing the tax incentive driving corporations to move operations overseas in search of a lower tax rate. Instead, this Article’s recommendation focuses on rewarding the positive externalities such operations create for domestic communities.