To the Editor:
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which in March passed both houses of Congress by overwhelming majorities, is notorious for giveaways to industry. Not only is there a huge slush fund to help large corporations with little effective oversight, but there are also specific boondoggles such as $17 billion to Boeing or a relaxation of the limits on using tax losses worth $170 billion to the real estate industry.
No doubt more problems will be discovered with this rushed legislation as it unfolds. But surely this is all temporary and will be repealed when the pandemic subsides? If history has a lesson, we should be careful in assuming that tax breaks enacted during pandemics are temporary.
During the Spanish Flu pandemic a century ago, which killed 675,000 Americans between October 1918 and March 1919, two major pieces of pro-business tax legislation were enacted. The Revenue Act of 1918 (enacted in early 1919) for the first time provided for tax-free treatment of any “reorganization, merger or consolidation,” to be defined by Treasury. It also for the first time in the world included a refundable credit for foreign taxes, so that a U.S. corporation that paid taxes overseas could reduce its U.S. tax liability by a dollar for each dollar of foreign tax paid.
These were remarkably business-friendly provisions. In particular, under the rules adopted by Treasury, a tax-free “reorganization, merger or consolidation” of two corporations included a sale of corporate stock or assets for cash. The foreign tax credit provided for a refund in cases in which the foreign tax rate exceeded the U.S. tax rate on the corporation.
Remarkably, these rules were adopted with almost no discussion or debate. Presumably, the fact that the flu was raging distracted everyone’s attention. The economy was hurting, and this was a pro-business piece of legislation, so Congress just adopted it.
But surely this was temporary? Not so much. It is true that in the 1920s, tax-free mergers were limited to transactions with at least 60 percent stock consideration (40 percent could still be cash), and the foreign tax credit was limited to the U.S. tax rate. But those fixes were all that were made — both provisions are still with us over a hundred years later, in the form of sections 368 and 901 of the IRC.
So, when looking for problems with the CARES Act, do not assume they will go away with the pandemic.
Reuven S. Avi-Yonah
Irwin I. Cohn Professor of Law
University of Michigan
Apr. 8, 2020