On 60 Minutes tonight, there was a story about how some corporations are filing income in other countries to get around our 35% corporate income tax rate. Leslie Stahl went to the international headquarters in Geneva of two companies from Texas and found that, in fact, they don’t really do anything in Geneva. Nobody was there – they just have mailboxes. She interviewed Texas congressman Lloyd Doggett, who wants to pass a law that requires companies to pay taxes based on where they do business and make decisions, which would mean that those companies would have to pay U.S. taxes. It seems the simple threat of that is making those companies take action. And guess what they did…
The companies sent their executives to live in Geneva so that they can be in compliance with the law if it’s passed. Now not only does the U.S. not get to tax their companies’ profits, they don’t get taxes on all the daily items their executives buy because they’re spending most of their time in Geneva. Way to think that one through, Rep. Doggett.
As the congressman says, “We can’t write a law that their lawyers can’t get around. That’s the whole problem here.” Although it pains me to say this, the problem is not the lawyers. The problem is that we have the second highest corporate tax rate in the developed world (soon to be the highest when Japan lowers its next month) and, duh, companies are going to want to get around it. If you try to make them file taxes where their executives are, they’ll move their executives where it is cheap. If they tried to make them pay where their production facilities are, guess what? Some of them will move their production facilities and we’ll lose even more jobs.
Ms. Stahl responds: “You’re in Congress. Why did Congress write these laws that allows (sic) this to happen?”
I don’t know who is revealing their ignorance more in this interview, but clearly neither of them has heard of the Law of Unintended Consequences. Rep. Doggett seems to think that we need to find a way to draft a law that forces people to stay in this country, prevents any company from moving, and makes people do what the government wants to them to do so they can collect their taxes. Ms. Stahl implies that it’s possible to write a law that will have no unintended consequences, and seems to chastise Congress for not having done so already.
They both need to read Applied Economics: Thinking Beyond Stage One by Thomas Sowell to understand that if all you’re thinking about is the immediate impacts of a law, you’re bound to write a bad law. Every policy has initial impacts and then secondary and tertiary impacts as people respond to it. Focusing on stage one is easy, and is what our lawmakers do most frequently. It also often leads to bad policy.
People are rational. The tax base responds negatively to higher tax rates. Raise taxes and people will try to find ways around paying them. Change the rules and they’ll find even more ways. What’s so hard to understand about that?
The problem Doggett has is not with the laws. He has a problem with basic human behavior and rational thinking — the people responding to laws by changing their behavior to make themselves as well off as possible are rational; the people writing laws thinking they can control how people will respond are the irrational ones.