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Rampell: Corporate tax returns should be public

First Published Aug 22 2014 10:44 am • Last Updated Aug 22 2014 10:46 am

Tax inversions. Double Irish with a Dutch sandwich. Spinning off tangible assets into real estate investment trusts. Son-of-BOSS shelters.

These are among the array of eye-glazingly complicated tax avoidance strategies adopted by America’s biggest companies. Each gets a moment in the sun when some enterprising journalist stumbles upon a particularly egregious example of its use; the public expresses outrage; policymakers denounce the behavior, which they themselves have incentivized; and then maybe Congress plays whack-a-mole trying to close the loophole. Then the public forgets, firms come up with inventively aggressive new strategies, and the pattern repeats.

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Here’s a proposal to try to curb this cycle: Require all publicly traded companies to make their tax returns public. Period.

This is not a new idea. When the modern federal corporate income tax was introduced in 1909, it came with a requirement to disclose the returns. Such transparency mandates were fought over bitterly for the next couple of decades, and U.S. returns have been confidential since 1935.

The basic rationale behind tax transparency is that shareholders (and creditors and the general public) deserve to know what publicly traded companies are doing, particularly if complicated tax acrobatics are distorting their operational and investment decisions. Today, publicly traded corporations must disclose some information about their accrued tax liabilities in Securities and Exchange Commission filings, but even tax experts find it nearly impossible to reconstruct what they actually pay from year to year, and to whom — let alone what kinds of intricate shelters they’ve crafted to be able to tell one audience (the public) that they’re hugely profitable and another (the Internal Revenue Service) that they’re barely scraping by.

The objections, on the other hand, tend to fall into three categories.

One is that disclosure will lead to a rash of misinformed analysis as the public tries to conduct amateur audits of firms’ tax returns, which can run many thousands of impenetrable pages. I am unsympathetic to this argument; the counter to bad information is more and better information. And given the massive defunding of the IRS in recent years, maybe it’s not so crazy to want more eyeballs — including those of outside tax experts — on companies’ tax filings.

The second objection relates to giving away trade secrets. But the strategies that companies employ to comply with the law should not be proprietary. If companies fear that disclosing tax returns would reveal non-tax-related competitive information, perhaps there is a way to allow for redactions. But I’m not convinced this is actually a risk.

The final objection is that disclosure could lead to more aggressive tax avoidance, not less. After all, firms might learn from one another about snazzy new ways to shelter income and feel pressure to be more aggressive tax-dodgers than they already are.

"All of a sudden you can easily check your competitors’ tax rates, and if yours is higher than theirs, that’s going to be a problem," said Alex Raskolnikov, a tax law professor at Columbia Law School. "You could end up in a race to the bottom."

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Perhaps, but another possible result is that, over the long run, companies invest fewer resources in tax avoidance, since they would be forced to share the fruits of their tax departments’ labors with free-riding competitors. And from a social welfare perspective, we want companies to focus their R&D on creating the next iPad, not on finding ways to make their iPad-generated profits magically disappear.

Under the current system, you really can’t blame companies for maintaining massive tax departments, which wade through our convoluted tax code in search of savings.

"Our U.S. code imposes on CEOs a fiduciary obligation to do the best by their shareholders, which very much includes minimizing taxes," Ivo Welch, an economics and finance professor at UCLA’s Anderson Graduate School of Management, wrote me in an email. "Arguably, a CEO who does not take advantage of a Double-Dutch when (s)he can and instead pays taxes can in principle be taken to court for neglect."

And then we consumers — and our public officials — have the gall to accuse these firms of being unpatriotic.

Right now there is so little public understanding of how widespread tax avoidance is that individual companies with the misfortune of ending up in a reporter’s cross hairs are vilified, even when their actions are legal and quite commonplace. With more transparency, public discourse could shift away from shaming individual companies and toward shaming Congress for creating, and perpetuating, our terrible, convoluted, loophole-riddled tax system in the first place.


Twitter: @crampell

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