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Wednesday, July 13, 2011

Johnson: A 1% Tax on the Market Capitalization of Public Companies

Tax Analysts Calvin H. Johnson (Texas) has published Taxing GE and Other Masters of the Universe, 132 Tax Notes 175 (July 11, 2011). Here is the abstract:

General Electric Co. paid essentially no tax in 2010. A 35% tax on GE’s economic income would have been $6.8 billion, or $4.7 billion with inflation adjustments. Generally accepted accounting principles and tax accounting allow too much expensing of investments, and ignore predictable future income, the use of tax havens, and accelerated depreciation.

The government can most easily and fairly collect the requisite tax from GE by imposing a tax on the fair market value of its capital. The government can charge GE $6 billion to $7 billion a year for access to public markets and GE and every corporation would be willing to pay that much to give its shareholders access to ready liquidity.

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1. Does the Constitution permit Congress to levy this tax?

2. Does anyone care about the answer to question 1?

Posted by: AMTbuff | Jul 13, 2011 7:15:47 AM

Or maybe a tax on book value would be better. I'd have to read the paper to see if the argument is that it is good to tax a basically sound company that is presently making a loss. It might be good for the economy, however, to tax consistently unprofitable companies that are using valuable capital and should be encourgaed to shut down.

Posted by: Eric Rasmusen | Jul 13, 2011 7:27:58 AM

This is insane. What about companies that are truly losing money(cash flow negative)? If your goal is to kill capital formation and job creation, while forcing companies to go private or list overseas, Then it's a great plan.

Posted by: Jeff | Jul 13, 2011 7:34:56 AM

Having now skimmed the paper, I see that the idea is something like that companies ought to have to pay the government for the advantage of being publicly traded.

That notion seems dubious to me, but there actually is a much better reason to tax capitalized value, at least if we abolish the corporate income tax: the value tax more accurately reflects profits and is easier to compute. Maybe I'll write that up-- it's a great idea. If anybody else wants to work on it first, though, go ahead-- I'm pretty busy as it is.

Posted by: Eric Rasmusen | Jul 13, 2011 7:36:02 AM

Sounds like a great reason to go private!

Posted by: Doc Merlin | Jul 13, 2011 7:38:16 AM

I am surprised at a tax lawyers ignorance of financial reporting. GE operating companies paid billions in taxes, while the holding company paid none due to the write-offs from its losses. Using market value for a tax basis, instead of money flow (income), creates more problems than it solves as most freshman finance & econ courses tell us.

Posted by: john campbell | Jul 13, 2011 7:41:49 AM

Another way to drive businesses out of the country.

Posted by: Mike | Jul 13, 2011 7:43:54 AM

Umm, an alternative minimum tax for corporations. What could possibly go wrong with that?

Posted by: Octus | Jul 13, 2011 7:54:52 AM

The government can charge GE $6 billion to $7 billion a year for access to public markets and GE and every corporation would be willing to pay that much to give its shareholders access to ready liquidity.
I'd love to know what universe Professor Johnson is living in to think that corporations would relish the idea of handing over an extra 1% of their market cap to Uncle Same yearly, as some sort of "existence" penalty.
The same way Professor Johnson would be willing to pay me all the cash in his wallet after I pointed my pistol at his head, I'd imagine.

Made money this year? Great. . .hand Uncle Sam 1% of your market cap.
Had a bad year? Tough s@#$t. . .hand Uncle Sam 1% of your market cap.

American GE shareholders are already still taxed on all their dividends and capital gains (assuming they're lucky enough to have any). If the Obama administration would have its way, both would be taxed as ordinary income.

This plan makes perfect sense. . .if your goal is to cause every public company to take itself private or to locate abroad to a more favorable tax jurisdiction.

Posted by: Looking closely | Jul 13, 2011 7:55:13 AM

Another communist idiot. Great idea there Johnson. Lets encourage every US public corporation to move offshore and for every US investor to open foreign brokerage accounts.

Posted by: cubanbob | Jul 13, 2011 7:56:09 AM

He's proposing a direct tax on capital? Hmmm... short of actually shooting business executives and any engineers who wear glasses, I can't think of a quicker way to destroy both business in the U.S., and everybody's pension funds.

Or is he only proposing a bill of attainder against GE, and not a generally applicable law taxing all capital?

Posted by: Joe Blow | Jul 13, 2011 8:02:16 AM

This could have some negative consequences, but I have to say I like the idea of an AMT for corporations. If structured correctly, it could leave most companies alone, while collecting taxes from crony companies who have politicked their way out of paying any taxes (and into "profits" that come from legislative favors instead of market success).

Posted by: BarryD | Jul 13, 2011 8:14:53 AM

Is he suggesting that the tax (er pardon me, "charge") is in addition to, or instead of, corporate income tax?

Posted by: Robert | Jul 13, 2011 8:15:13 AM

" willing to pay that much to give its shareholders access to ready liquidity."

So I guess Mr. Johnson actually has limited experience with funding of corporations and the decision to go public or private? First, we have already seen the cost, both actual and potential through exposure to regulation and claims, rise dramatically in the past decade. The costs and exposure have risen to the point that you need a very large company before it makes any sense to be public. As we have seen even very large companies will avoid it if they can, and with large funds as private investors it is now possible to assemble capital without the public markets. When I have someone start talking about an IPO, my first question is why would you want to do that? This tax would just add to the costs.

Aside from those issues, is he proposing a tax on total GE capital - even that located outside the US? I see a lot of companies rapidly re-incorporating elsewhere and listing elsewhere. This proposed tax would be a boon for Bermuda lawyers and foreign exchanges.

Posted by: Over50 | Jul 13, 2011 8:20:58 AM

This is the most telling line to me: “He wishes to thank...for helpful comments, without holding them responsible for conclusions with which they disagree.”

Posted by: Cody | Jul 13, 2011 8:54:13 AM

We need a tax on stupidity. Financial problems solved!

The only argument against it is that it might constitute a bill of attainder against liberals.

Posted by: Occam's Beard | Jul 13, 2011 8:56:36 AM

"The government can charge GE $6 billion to $7 billion a year for access to public markets..."

Apparently the government owns the markets. Well, they took possession of the citizens with Obamacare, so I guess this makes some sense.

Posted by: Rob Crawford | Jul 13, 2011 9:02:55 AM

One of the primary purposes of government is to promote the economy and businesses to be as profitable as possible. The underlying reasoning behind this, and I don't care for crony capitalists at GE, is that a company should be grateful for the government for doing what they should do.

Posted by: Geoff | Jul 13, 2011 9:29:36 AM

> I have to say I like the idea of an AMT for corporations. If structured correctly

It's poor form to assume the unlikely.

To put it another way, I like the idea of Jessica Alba walking through my office, but it would be silly to do something that works out only if that happens, something that goes horribly wrong if she doesn't show (again).

Posted by: Andy Freeman | Jul 13, 2011 9:35:53 AM

A VAT would be easier, fairer, and more rational.

Posted by: Jim DC | Jul 13, 2011 11:02:31 AM

What is it that people don't understand who pays corporate taxes. The consumers of their products pays their taxes. A tax on corporations, including the VAT, is a consumption tax on consumers. Where does Professor Johnson think the corporations derive the money to pay taxes?

Posted by: ghogan | Jul 13, 2011 12:16:35 PM

How does this direct tax on corporations square with Article I, Section 9 of the Constitution? If legal it would be a great way to drive down share prices.

Posted by: William Hamblen | Jul 13, 2011 12:38:37 PM

This knucklehead isn't worth the bile welling up in my throat.

Step one. Eliminate tenure. Remember, this guy is helping to mold the next generation of lawyers.

Posted by: Choef | Jul 13, 2011 1:46:23 PM

No corporation has paid tax in an open economy in the history of the world, ever. Oh sure, the CFO might sign a cheque to the government, but the company doesn't pay a penny. Perhaps this oh-so-learned professor should look up the meaning of the word 'incidence'. Tax is paid by capital (reduced dividends to shareholders), society at large (through higher prices) and, above all, by labour, in the form of reduced wages to employees.

By some estimates, the incidence of corporation tax on employees of the corporation can be greater than 100% - that is, the income they forgo due to reduced salaries is greater than the tax levied.

Posted by: David Gillies | Jul 13, 2011 2:18:22 PM

Many states have alternative "Franchise Taxes", why not the Federal Government? States like TN have a tax based upon "Net Worth" as well as the Net Book Value of Assets used in the state. Tennessee is doing just fine compared to a lot of states regarding the attraction of new business so its not going to drive companies away. Not having a personal income tax in TN may drive some of that but we (The USA) need to have safety nets in place so companies don't get away with exploiting markets and not paying tax. I like this blog and think you're doing a great job! Keep it up!!!

Posted by: John Skowronski | Jul 13, 2011 2:52:59 PM

This has the potential of a clever approach as an alternative to income taxation. It lets the market make an assessment of the firms long-term earnings, and bases the tax on that. If a firm's stock sells at a PE of 15, a 1% tax on market cap implies and income tax rate of 14.5%. Not brutal. If used as an alternative minimum tax, this would be a whole lot simpler than the current mess, and harder to fudge.

Posted by: Mark Laskow | Jul 14, 2011 6:00:57 AM