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Paying for the Pandemic: Essential Principles for Business Taxation

Posted on July 22, 2020

In part three of our three-part series: Paying for the Pandemic, Kimberly Clausing, professor of economics at Reed College, and Robert Goulder, Tax Notes International contributing editor, discuss the role of business taxation in economic recovery.


Here are a few highlights . . .

On government pandemic loans and grants for businesses

Kimberly Clausing: We need to distinguish between what's temporary and what's permanent. If a business was having losses in earlier years, or if a business had a business model that no longer worked in today's economy, [then] we wouldn't want to be necessarily propping up such businesses. One distinction I make is between airlines and cruises . . . cruises have long had health issues that are broader than just this one. . . . Some of these judgments can be difficult to make, but I think that the goal is to help companies that you think under the normal course of business would be sustainable, but not to prop up ones whose fundamental business model has been shown to be problematic.

We have companies like cruise ships that are conveniently headquartered in tax havens where they're receiving all the full benefits of the countries in which they operate, but they're not paying tax to any government, except for maybe minimal fees. It's hard for me to argue that hardworking taxpayers should be subsidizing the survival of such companies. In my view, it's sort of a pay-to-play system. If you want to be a responsible corporate citizen and pay your taxes and do the normal things that we expect people to do, then you expect society as a whole to support you in your time of need. But if you've gone out of your way to invert the company and put it into a tax haven so that you wouldn't ever have to owe the U.S. government anything, then I'm not sure the U.S. taxpayers should be really worried about your future.

On the reach of the CARES Act

Kimberly Clausing: If you look at the legislation in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, there were some elements that I think were well targeted and some that were poorly targeted. There were a lot of companies that got really generous loan forgiveness, even though their operations might have looked pretty indistinguishable from what they were before. I have an example of a friend who has a law firm and it's really had the same amount of business that it had all along, but it qualified for these loans that then let it actually be forgiven if it kept its payroll up. So, what you're really doing is you are now subsidizing a successful firm that hasn't seen a reduction in its business. 

I think another thing Congress could think about is whether it wants to take companies that received these really generous benefits and either treat that as taxable income or deny the deductions for the way it was spent. At present, they're kind of letting companies have both.

On broadening the OECD’s Pillar 1 and Pillar 2

Kimberly Clausing: The OECD processes will need to be bolder and extend past what they have done with Pillar 1 and Pillar 2. One difficulty with the U.S. and supporting those pillars has been that, because they're focused on digital taxation and because the most successful digital companies in the world are at present in the United States, it sort of feels to both Democrats and Republicans like the U.S. companies are being singled out for this extra treatment.

One way that might help bring the U.S. on board... is to make some of the principles behind that digital tax initiatives extend a little more broadly. We think all income should be taxed somewhere, right? A minimum tax principle doesn't have to just be digital companies. It can be pharma, tech, car companies... whoever on the globe is making these high profit products I think should be subject to some minimum level of taxation. 

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