Why the U.S. needs a corporate wealth tax
(This piece was originally published as an Op-Ed in the The Star-Ledger.)
For years, many corporations have abdicated their civic duties and have paid little or no tax. There are several reasons for this phenomenon: globalization enables corporations to assign profits to low-tax offshore jurisdictions; the Tax Code provides robust write-offs for capital expenditures; and adroit advisors devise clever strategies that enable corporations to navigate around otherwise onerous tax burdens. The combination of these factors has greatly eroded the corporate tax base.
At the same time, corporate economic growth has been stratospheric. By way of example, over the last decade, the combined market capitalization of the companies listed on the New York and NASDAQ stock markets has more than doubled, from $12 trillion in 2009 to over $30 trillion today. Despite this massive economic growth, while the corporate income tax once provided the nation with approximately 40 percent of its overall revenues, today it accounts for roughly 6 percent.
But corporations continue to rely heavily upon the nation’s infrastructure and trained work force to propel their hefty profits. As a quid pro quo for these resources being supplied to them they have profound moral and economic obligations to shoulder part of the tax burden and to help fund public expenditures.
The traditional metric for assessing corporate taxes – net income – has proven too elusive and malleable to rely on exclusively. Instead, Congress should consider imposing a “wealth tax” upon publicly traded corporations, based upon the difference in their fair market value at the beginning of the year and at the end of the year.
To illustrate, consider a publicly-traded corporation that, on Jan. 1, had 100 million shares outstanding trading at $7 per share. Suppose that by the end of the year, that the share price had risen to $12 per share. In this case, the value of the corporation clearly increased by $500 million (i.e., ($12 - $7) x 100 million). Notwithstanding what the corporation reflected on its tax return, Congress could impose a 5 percent wealth tax on this growth and collect $25 million in tax revenue.
The advantages associated with the imposition of a corporate wealth tax are enormous. First and foremost, it would be virtually impossible to evade: the trading prices of publicly listed companies are readily available and not susceptible to being camouflaged. Second, its imposition should have little distortive economic effect on corporate behavior, as there are few plausible scenarios in which a corporate enterprise would purposefully seek to diminish its share price. Third, this proposed tax, depending upon the rate set by Congress, should raise significant amounts of revenue. If market capitalization of the New York and NASDAQ markets equals $30 trillion, a 10 percent market rise in stock prices could yield billions of dollars of revenue.
Admittedly, as with any proposed solution, there are some shortcomings associated with the imposition of a corporate wealth tax. Corporations are apt to cry foul, complaining that the expectation of potential profits as reflected in stock price does not necessarily translate into actual profits. How should they therefore be expected to pay tax on phantom profits?
The answer is twofold: to meet this tax obligation, such corporations can issue more stock to raise additional capital and, furthermore, to gain economic stability after a company’s initial public offering of such stock, Congress can grant it a two-year value tax holiday. Another concern is that, to avoid this tax, some companies may instead choose to list their companies on a foreign stock exchange; yet the current allure of U.S. stock markets and their ability to facilitate capital generation is too attractive to make this a truly viable option.
The bottom line is simple: In order to ensure that publicly traded corporations – the bulwark of the nation’s economy – fulfill their financial responsibilities to help keep the country solvent, the corporate income tax requires that a complementary wealth tax be imposed. Failure to impose such a tax perpetuates a world in which many corporate taxpayers reap all the benefits the country has to offer, but bear none of its monetary burdens.
Jay A. Soled is an accounting professor at Rutgers Business School and director of the Rutgers Masters in Taxation Program. Dan Palmon is an accounting professor at Rutgers Business School who holds the William J. von Minden Chair in Accounting. He is also chairman of the Department of Accounting and Information Systems.
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