Disparate stories that provide a lesson about tax policy
What a Turning Point political rally and a $10.7 billion tax dispute have in common.
I want to connect two highly disparate stories to make a generic point about tax policy.
The first is reporting by the Arizona Republic’s Richard Ruelas, my former video partner, on a rally held to support David Farnsworth in his primary race against Rusty Bowers. The rally was held by Turning Point, a new right grassroots organization.
There are three Turning Point organizations. Two, Turning Point USA and Turning Point Action, are tax-exempt nonprofits. Contributions to them are tax deductible. The third entity, Turning Point PAC, is a political action committee. Contributions to it are not tax deductible and are reportable.
The political activities of nonprofits are supposed to be limited. Yet the rally to support Farnsworth and defeat Bowers was sponsored by Turning Point Action, one of the nonprofits. At the rally, attendees were given door hangers to distribute in the district advocating for Farnsworth and denouncing Bowers. The flyers were printed by Turning Point PAC.
The second story was in the Wall Street Journal regarding a tax dispute between the IRS and Amgen, a biotech drug manufacturer. The IRS claims that Amgen owes an eye-popping $10.7 billion in back taxes. The company has a production facility in Puerto Rico. U.S. tax laws offer highly favorable treatment for income earned in Puerto Rico. The dispute is over how much of Amgen’s profits should be allocated to U.S. activities vs. those in Puerto Rico.
Here is the connecting point: Both stories illustrate inevitable problems and complexities when tax policy deviates from the principle of raising the desired amount of government revenue in the most efficient way and in the way that least affects the decisions of private sector actors.
In the political world, Turning Point is hardly alone in skating along the edges of permissible activity by a tax-exempt nonprofit. However, the problems with government giving favorable tax treatment to contributions to some organizations and not to others goes way beyond enforcement of the rules.
I’m a radical when it comes to tax deductions and credits. I would abolish all of them.
This is in part in advancement of sound tax policy. Tax rates should be as low as possible on as broad of a tax base as possible. Deductions and credits erode the base, putting upward pressure on rates.
But this is also based on a belief that politicians and bureaucrats shouldn’t be picking and choosing which claimed charitable or educational organizations should get favorable treatment regarding the contributions they collect.
And also on the practical difficulty of drawing and enforcing any lines that are created. Subsidize churches and the Salvation Army and you end up subsidizing a Turning Point political rally. Subsidize tuition to attend private schools and you end up subsidizing rich people buying Teslas.
Government should raise the revenue it needs and then let Americans decide what they want to do with their after-tax dollars without the government seeking to influence that. Americans are instinctively charitable. I don’t think eliminating deductions and credits would have the devastating effect the nonprofit sector claims and fears.
The corporate income tax is the least efficient and most distortive way for the government to raise revenue.
There’s an old accounting saw that profit is an opinion while cash is a fact. Whence revenue was generated and what are allowed business expenses requires a blizzard of rules and regulations, legions of accountants and lawyers, all without producing clear answers, as the Amgen dispute illustrates.
If there is a desire to collect part of government revenue directly from businesses, the only efficient and non-distortive way to do it is to base it on sales. There can be some disputes as to where a sale takes place, but that’s nowhere near as complex a question as how much profit was made and where it was earned.
This is another area in which it would be beneficial to get politicians out of the practice of using tax policy for something other than raising a desired level of government revenue. They are very bad at it.
To encourage investment, Congress decided to allow major capital expenditures to be written off for tax purposes far quicker than allowed under accounting rules for reporting financial results to shareholders. This led to a fully intended discrepancy between profit reported for tax purposes and profit reported to shareholders. But now Congress is contemplating a minimum corporate income tax rate, which would reduce the value of the incentive for investment Congress previously created.
Politicians shouldn’t be attempting to influence the amount or timing of corporate investment decisions. Let them make those themselves. And then tax them on the gross revenue those decisions produce.
We are obviously very far from having a tax code that produces a desired level of government revenue in as efficient and non-distortive a way as possible. But, from time to time, it’s worth restating why that should be the lodestar.
Reach Robb at email@example.com.