by T. R. Reid
Here’s a sampling of federal corporate income tax rates, as of 2016 (note that some countries have a basic corporate rate and then a higher rate for oil companies):
Country
Corporate tax rate
Ireland
12.5%
Ireland (oil companies)
25%
Germany
15.85%
China
25%
Japan
23.9%
Sweden
22%
U.K.
20%
U.K. (oil companies)
30%
Mexico
30%
United States
35%
France
38%
Source: ey.com, 2016 Worldwide Corporate Tax Guide
Our corporate tax code, of course, is riddled with exemptions and deductions and credits that sharply reduce the amount of tax corporations actually pay. Still, the amount that American corporations actually pay—this is known as the “effective rate”—is generally higher than corporations pay in other countries. Some giant companies have managed to manipulate these tax breaks so skillfully that they pay little or no U.S. income tax. U.S. companies have also devised intricate and ingenious runarounds so that their profits are taxed overseas, at the lower corporate rates due in foreign countries.
Beyond that, the United States is one of a handful of countries that impose corporate tax on income earned anywhere in the world, not just in the home country. In most industrialized countries, a company pays tax to its home country only on profits it has earned at home. The United States, though, imposes tax on an American company’s earnings no matter where the income was earned. However—and this is a multitrillion-dollar “however”—the foreign earnings are not taxed until the corporation brings them home to the United States. That is, a company can avoid the tax on its foreign earnings by keeping the profits overseas. And that’s precisely what they do. U.S. corporations have a vast accumulation of foreign earnings stashed in banks and securities around the world. Because that money has never been brought home, the companies don’t have to pay tax on it.
Yet this is a costly form of tax avoidance. If you can’t bring the money to the United States, you can’t use it here for salaries or capital investment or for paying dividends to stockholders. It seems possible that American companies have been way too clever about stashing their earnings overseas. There is so much corporate money out there—more than $2 trillion, by many estimates—that stockholders and employees of the companies are demanding that the funds be “repatriated” and distributed at home as salaries or dividends. The companies don’t want to pay the U.S. tax on that money, but at the same time they don’t particularly want to keep their profits stuck forever in a bank in Bratislava.
The extravagant tax on corporate income, though, doesn’t change the basic pattern we saw a few pages back. Overall, the United States is a low-tax country, compared with other rich democracies.
It shouldn’t come as a surprise, then, that the United States also rates low, comparatively, when it comes to government spending. You’d never know it from listening to our political debates, but the international organizations that study such things all agree that the U.S. government is a frugal penny-pincher—compared with the other rich countries, at least.
The World Bank each year computes government spending as a percentage of overall wealth (GDP) for all the world’s countries. In the poorest countries, where almost nobody has any money, government spending amounts to about 10% of GDP. In the rich countries of western Europe and East Asia, government spends roughly 20% to 26% of GDP (once again, Sweden and Denmark usually have the highest rate of government spending). In the United States, in 2015, governments at all levels spent a total of 15.5% of our GDP, which puts us near the bottom of the list. Among the world’s richest countries, only South Korea and Mexico had a lower rate of government spending.
The U.S. government is a huge spender, of course, on some things. We pour more money into national defense than anybody else; our defense budgets, in fact, are bigger than those in the next eleven countries combined. But American governments spend much less than other advanced democracies on social support for low-income and retired people.
Americans—individual citizens, that is, not the government—make up for that diminished public spending on social programs by generous private giving to charities, churches, schools, and hospitals. In 2013, American citizens and foundations gave some $335 billion to charity—about 2% of our GDP. Most other rich countries lag far behind us on this score. The French give 0.02% of GDP to charity—that is, one-hundredth of Americans’ giving. The British contribute 0.07% of GDP to charity; Canadians, 0.05%.9 As this pattern shows, the French, Brits, Canadians, and others expect government to bear the burden of social support for the needy; that’s why they willingly pay high taxes. Americans choose to make private donations a much bigger share of social spending.
While Americans pay much less in tax than our counterparts overseas, we complain about it much more.
There’s no country where people gripe as much as Americans do about taxes in general and the Internal Revenue Service in particular. Hardly anybody in any nation enjoys paying taxes. But in most developed countries, the national tax agency is a respected and admired branch of government. Swedes rate their national tax bureau as the most respected of all government agencies. All over the world, tax bureaucrats proudly wear neckties, jackets, and baseball caps bearing the agency logo. Tax bureaus like Her Majesty’s Revenue and Customs in the U.K., the Agenzia delle Entrate in Italy, Spain’s Agencia Tributaria, and Nigeria’s Federal Inland Revenue Service have their own banners, mascots, songs, and slogans. (“We can’t make paying taxes pleasant, but at least we can make it simple.”)
Chile’s Servicio de Impuestos Internos has adopted a mascot—a furry little chinchilla that serves as the tax bureau’s friendly face to the public. Ivo the Chinchilla (his name is a play on IVA, the Spanish equivalent of a VAT) stars in stage plays and movies, telling adults and schoolchildren how important it is that people pay all the tax they owe. “¡Son bacanes, los impuestos!” Ivo says in one film: “They’re awesome, those taxes!” Then he gets downright rhapsodic about the blessings of taxation. “When the government builds schools and bridges and hospitals and playgrounds,” Ivo says, “it’s all thanks to people paying their taxes on time.”10
One of the most beloved movies in Japan—a runaway winner of the Best Actress, Best Actor, Best Director, and Best Picture Oscars there—was Marusa no onna, or “Audit Bureau Woman.” (In the English-dubbed version of the movie, the title is A Taxing Woman.) It tells the tale of a charming but tenacious tax auditor in the Tokyo Audit Bureau of the National Tax Agency.
Our plucky heroine, played by Miyamoto Nobuko—Japan’s Meg Ryan—starts out investigating small local businesses. When she assesses a $2,000 penalty against a mom-and-pop grocery store, the owner responds in a rage: “Why do you go after small fry like us? Why don’t you aim at the really big tax cheats?” Chastised, Nobuko asks to be assigned to the account of a wealthy, well-connected gangland kingpin, a man who rides around Tokyo in a chauffeur-driven white Rolls-Royce—but never pays much tax. She spends the rest of the film following the big white Rolls on her little red motor scooter, uncovering a long trail of forged receipts, hidden cash, and fake bank accounts. In the climactic scene, when Nobuko digs through a moun
tain of paper and finds the telltale document that will send the tax evader to jail, the whole theater bursts into delighted applause. The credits tell us that the film is dedicated to “the steadfast resolve of the incorruptible Japanese Revenue Service.”
It’s hard to imagine Hollywood casting Meg Ryan, say, or Amy Schumer as a peppy, pretty tax collector in a sympathetic film about the “steadfast resolve” of the Internal Revenue Service. In America, rather, employees of the IRS say they routinely face anger and hostility when they tell people where they work. In 2010, an antigovernment fanatic flew a small plane into the IRS building in Austin, Texas, leaving one employee dead and a dozen injured; the pilot left a suicide note boasting of his attack on “Big Brother IRS man.” The agency is a common target of columnists, cartoonists, comedians, and congressmen. Politicians and pundits routinely compare IRS agents to terrorists. One of the regular events on the congressional calendar each year is a hearing where angry senators or representatives line up a group of hapless IRS bureaucrats at the witness table and berate them for a couple of hours because the tax system is so complicated and difficult.
Many members of Congress, of course, are serious, fair-minded public servants, but the institution has always had its share of grandstanders and hypocrites. When I was a congressional correspondent, I always thought the acme of arrogance and phoniness came in those IRS-bashing sessions before one committee or another. This is, after all, a classic case of blaming the messenger. It’s Congress that makes our tax code so complicated and difficult. It was Congress, not anybody in the IRS, who wrote Section 7803(c)(2)(B)(ii)(IX) and all the other impenetrable sections of the code. For the members who created this unruly mess to criticize the bureaucrats who have to administer it is like a chef who spills a vat of tomato soup and then complains to the janitor because the floor is dirty. And yet these hearings continue, Congress after Congress, because Americans love complaining about taxes and the agency that collects them.
Nobody likes paying taxes. But we pay them, because taxes are inescapable—nothing is certain, of course, except death and taxes—and because we’re convinced that taxes are necessary. But why are taxes necessary? What are they good for, anyway?
3.
TAXES: WHAT ARE THEY GOOD FOR?
One Saturday afternoon, a great teacher of ethics told his students that their class session would take place at a local temple. The teacher had an important lesson about paying for public programs—in essence, about tax policy.
The teacher and his followers arrived at the synagogue just before the service started and stood in the rear, watching as the worshippers filed in. It was the custom then that the front rows were reserved, for a fee, by wealthy families. The benches at the back were left for the poorest members of the community, those who couldn’t pay for a better row. Shortly after the service began, the rabbi called for a collection, to pay for the maintenance of the temple and for its social programs in the neighborhood. When the plate was passed, an imposing man in the first row, beautifully dressed and flanked by a retinue of family and servants, ostentatiously donated 1,000 ducats. A couple rows back, a man with even fancier clothing and even more servants made a great show as he gave 2,000 ducats. Eventually, the plate made its way to the back row, to a poor widow, dressed in rags and carrying a moth-eaten cloth handbag. She dug around in the bag for a while and eventually extracted two coins—two “mites,” worth about a penny each—and placed them in the collection plate.
At which point, Jesus Christ told his disciples, “Verily I say unto you, that poor widow gave more than anyone else.”
This story is known as “the widow’s mite”; it’s told in two of the New Testament Gospels.1 Christ’s statement can today be recognized as a central principle of tax policy around the world: The funding of community programs, whether through donations to the synagogue or taxes paid to the government, should be carried out in a way that is proportionate to wealth. If the rich man pays $10,000, but still has a million left in the bank, his tax burden is actually lighter than that of a widow who pays $10 but has no savings to back it up. The crucial point is not how much somebody pays in taxes but rather how much she has left after paying. This biblical lesson has been invoked time and again to justify a tax code that calls on the rich to pay higher rates than the poor.
When taxes work that way, people tend to perceive them as “fair.” And that perception is crucial to a successful tax regime: no system of taxes can be successful unless the taxpayers believe that the system is essentially fair. Nobody likes to pay tax, but people will pay if they sense that the regime is treating everyone justly. Opinion polls in every country show that people think the rich are undertaxed and should pay more. You might say that this is evidence of envy or resentment. Or you might conclude that these surveys reflect a basic human sense of fairness, an innate appreciation for the proportionate system of payment that Christ demonstrated so vividly in the temple. The American sage Will Rogers captured this concept precisely. Of course people like low taxes, Rogers said, but there’s something even more important: “People want JUST taxes, more than they want lower taxes. They want to know that every man is paying his proportionate share according to his wealth.”
This, then, is one of the basic reasons for taxes; they can make a population feel that its government is treating everybody fairly. That, in turn, enhances the political legitimacy of the state; it gives people a stake in good government and makes them better citizens. Some economists have argued, in fact, that this is the main reason to have a proportionate tax system in the first place.2
Which is something of a stretch. The main reason for taxes is to pay for the activities of government, for the goods and services we have decided to provide collectively rather than leave every man for himself. Highways, parks, playgrounds, schools, courts, Coast Guard cutters, air traffic control, auto safety, the patent office, the Food and Drug Administration, old-age pensions, seniors’ health insurance, student loans, spies, libraries, collecting the trash, clearing the snow, putting out forest fires, printing money, issuing passports, battling ISIS, catching crooks—the list of public functions, even in a nation like the United States that is relatively hostile toward government, could easily fill this whole page. We do these things through government—although the choice is often controversial—after concluding that there are certain areas where a public endeavor is preferable to the private sector.
The fire department, for example, was not always a government function. In the first century B.C., the richest man in Rome was an entrepreneur named Marcus Licinius Crassus, a figure so grandiose and so enamored of ostentatious display that his name became an English adjective. The crass Mr. Crassus had business interests ranging from silver mines to the slave trade, but perhaps his most lucrative operation was his private fire department, the biggest of several commercial firefighting firms in Rome. When a house caught fire, his chariot carrying a big water tank would clatter through the stone streets. At the site, Crassus would start negotiating with the frantic homeowner to set a price for his services, while the hapless customer watched the flames spread. A common result was that Crassus acquired the property, with the former owner obliged to pay him rent for life. The homeowners of Rome began clamoring for a public fire department, to free themselves from capitalists like Crassus.
Crassus, who became the biggest real estate magnate in Rome, began investing his money in carefully selected politicians, lobbying against any Roman senator who proposed to make firefighting a government function. One of his fiscal beneficiaries was a popular general named Julius Caesar. In return, Caesar stood up for Crassus’s business interests and gave him various prestigious positions, including the command of an army fighting the treacherous Parthians in what is now Syria. This did not end well for poor Crassus, however. He was defeated at the Battle of Carrhae in 53 B.C. When the Parthians realized they had captured the richest man in Rome, the ancient histories say, they poured molten
gold down Crassus’s throat, on the theory that his lifelong thirst for gold should be quenched in death.
With Crassus out of the picture, the Romans fairly soon decided that the fire department was a function not well suited to the private sector. Almost all governments everywhere have reached the same conclusion. Around the world, firefighters proudly ride their long red trucks down the street during each city’s annual municipal parade. In Japan, city fire departments hold exhibitions on January 6 every year, the national Firefighters’ Day, where kids get to try on fireproof suits and sit at the wheel of a huge hook and ladder. When I went to the Tokyo event one chilly January, there was a sign at the entrance: “Honorable Tokyoites, we respectfully thank you! Your tax payments supplied our equipment.” After all, fire departments aren’t free; like the other activities of government, they must be paid for. And that’s why the only things certain, as Benjamin Franklin famously observed, are death and taxes. (And some people get hit with both at once, as we’ll see when we discuss the inheritance tax.)
This aspect of taxation was crystallized in the famous dictum of the Supreme Court justice Oliver Wendell Holmes Jr.: “Taxes are what we pay for civilized society.” That slogan today is engraved over the main door of the Internal Revenue Service on Constitution Avenue in Washington, D.C. Of course, the IRS doesn’t choose to remind us that Justice Holmes made that comment in a dissent against a decision of the court majority; it came in an otherwise forgotten legal dispute known as the Philippine Cigar Case.