WASHINGTON, April 9, 2016 — Two items in the financial news, the Panama Papers and tax inversion, underline the severe problems caused by over-taxation. Even though Democrats and Republicans agree on the problem in principle, they cannot cooperate to reach an acceptable solution. Their stop-gap fixes end up doing more harm than good.
The Panama Papers reveal about 214,000 offshore “shell companies” in more than 200 countries, dating back to the 1970s. These shell companies are not illegal, but a large portion of them were probably set up by very rich and politically powerful people to hide wealth offshore in order to avoid being over-taxed.
Corporate inversion occurs when an American company merges with a foreign-domiciled company, then relocates its corporate headquarters to that country. The objective is to avoid America’s high corporate tax rates on foreign earnings when they are returned to the U.S.
President Obama has repeatedly said that inversion transactions and mergers are some of the “most insidious tax loopholes out there.” He said it again this week, just before the U.S. Treasury Department imposed the toughest rules yet on U.S. corporations to significantly reduce the number of tax inversions. Those rules killed the impending marriage of a pair of pharmaceutical giants: Pfizer, currently located here; and Allergan, which itself relocated to Dublin, Ireland after a previous merger transaction.
The merger made sense from a business standpoint, but Pfizer’s motivation was enhanced by the prospect of relocating its headquarters to Dublin to pay Ireland’s lower corporate tax rate. Pfizer was motivated by the desire to avoid America’s high taxes.
Obama has noted that there are numerous tax loopholes available to large corporations and to very wealthy individuals. He is correct. Our highly complicated tax code includes hundreds of special exemptions and credits for some special interest groups.
The obvious solution to the problem is to eliminate all loopholes and cut tax rates. Then no one would get any special treatment. All Americans, including U.S. corporations, would be treated exactly the same.
In three or four columns this year, I’ve discussed the problems of over-taxation, corporate tax inversion and special loopholes for special interests in detail.
The solution to the problems was always the same: The Busler Single Rate Tax plan.
A 15 percent single rate tax on all income above a livable minimum (twice the poverty rate) with no deductions for anything. All income from wages, salaries, rent, interest, profit, dividends or capital gains would be taxed at the same rate. The corporate tax rate would also be 15 percent on all income earned. In addition, the entire 12.6 percent Social Security tax would be paid by the employer instead of being split between employer and employee.
The plan is revenue neutral and, perhaps with some tweaking of the livable minimum and/or the single rate, tax neutrality could be ensured. In addition, it treats all Americans exactly the same. The plan would double the growth rate of the economy in the short term and would continue to encourage higher growth rates in the long term.
Because of the low tax rate, there is no need to hide money in offshore accounts, so the Panama Papers issue wouldn’t exist for Americans. The tax inversion problem would also be eliminated since the U.S. would have one of the lowest tax rates in the world. In fact, the opposite of tax inversion could occur and we could see foreign companies re-locating to American shores.
Since there are no deductions at all in this plan, there are no loopholes. That eliminates the possibility of any entity looking for a way to minimize tax liability and eliminates as well the possibility of anyone receiving more favorable treatment than anyone else.
An individual’s tax return would be the size of a post card. The IRS would be virtually eliminated.
This plan also provides a clear definition for the concept of “fair share.” While there has been much discussion demanding that the wealthy pay their “fair share,” there has never been a clear definition of that appealing but highly imprecise term. Under this plan, the fair share is defined exactly the same for every American: above the livable minimum, 15 cents of every dollar earned goes to the Federal government.
For a family of four, the livable minimum is about $50,000. So zero tax would be due on any income below $50,000 and for each dollar above $50,000, 15 cents would go to the government. Remember, the 6.3 percent Social Security is no longer paid by the employee.
I am convinced that this plan solves every one of the problems caused by tax policy and it is consistent with the principles of freedom, democracy and free enterprise. It greatly benefits the vast majority of Americans. I welcome any opposing views and stand ready to answer all criticism.