Contact
Subscribe

Law of Unintended Consequences, international edition

Mar 27, 2011
Economics

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.

Share
4 Comments
Tags

4 Comments

  1. Doc Merlin  •  Mar 28, 2011 @6:16 am

    The idiots could have instead lowered our corporate tax rates… but nooooo they had to grandstand and then hurt us all.

  2. ProfSwitzer  •  Mar 28, 2011 @7:53 am

    This site has old episodes and this one will probably be on in a few weeks (http://www.yidio.com/show/60-minutes).

    I wrote this post while only halfway through the episode because I just couldn’t believe the logic, or lack thereof. But at the end, it got even better (worse?). After discussing possible options to get this foreign money back into the U.S. where it could create jobs, Leslie Stahl mentions the possibility of reducing the corporate tax rate. She says it will cost trillions of dollars. Apparently, lowering the tax rate will cost us money but raising it will…oh, wait, that doesn’t work either. She’s not considering at all the idea that lowering the tax rate will shift the tax base back to the U.S. and actually raise revenues. First-stage thinking at its finest.

  3. Benjamin Seghers  •  Mar 28, 2011 @10:43 am

    This is a good example of unintended consequences. But how many executives are willing to relocate to a foreign country so that their business can get a lower tax rate? A few, sure. But I’d be willing to hedge it wouldn’t be many.

    I don’t think that Rep. Doggett was necessarily wrong in the situation, as it is pretty absurd that a company can dodge taxes just by having mailboxes in a different country. I was actually reading a recent NYT article about how GE didn’t pay a cent in taxes, despite $5.1 profit from U.S. operations alone, and in fact received a tax benefit of $3.2 billion. For a company to make so much money and still receive a negative tax rate, it’s just a little beyond absurd. (Of course the proper response, believes Obama, is to name the CEO the head of a Presidential Council.) There’s good reason to tax business that do business, operate, or otherwise make profit in the U.S. (one of Reagan’s priorities, by the way). Rep. Doggett may not have found the best way to ensure it, but I think that says more about the corporations than it does about Doggett.

    (Added by Dave: Benjamin — the fact that there were two companies from Texas in this one town, and both of them were willing to have their executives work from Geneva, seems to me to be a pretty good indication that businesses and the high-paid executives who work for them are willing to do whatever it takes to save billions in taxes.)

  4. Nik Drescher  •  Apr 15, 2011 @12:14 am

    @Ben: When the company gets big enough to start thinking about moving around to avoid/reduce taxes they will be willing to move their upper management to another country to ensure they capture those reductions. To the CEO it is part of their job. They get to live in Switzerland or Singapore or some other country. And the company gets to save billions of dollars.
    On GE, I was under the impression they did not pay any taxes because of NOLs. Which is an accounting way of saying “We lost money last year, now we don’t have to pay taxes on it this year.” That is just basic US tax code. Individuals can do the same thing.

    Another thing about reducing the taxes is that the point where corps, who are already operating in the US, start looking for other tax solutions will increase. So any who may have switched at this current tax rate this year may not switch.
    @Dave: The problem with reducing corp taxes is that when corps choose a place to reduce their taxes in those taxes are not even close to the US taxes (when they move they do not do it half heatedly). So a small reduction won’t bring back that many people or companies who have the wherewithal to jump from country to country.

Leave a Reply