The Tax Man Goeth

This week’s New York Times report about General Electric’s ability to avoid paying any federal taxes is a timely reminder of a Washington truism: Those with the most lobbyists usually win.

The paper noted how an army of inside and outside influencers—many of them previous officials from the Treasury, IRS and Capitol Hill—have worked tirelessly to implement “an aggressive strategy” at GE “that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore.”

The bottom line, according to the Times: In 2010, “the company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.”

GE isn’t the only company to engage in such behavior. Last October, for instance, it was reported that Google cut its taxes by $3.1 billion in the last three years by using a technique that shifts most of its foreign profits through Ireland and the Netherlands to Bermuda—a series of moves known to lawyers as the “Double Irish” and the “Dutch Sandwich.”

All in all, the Times said, such strategies (along with changes in tax laws that have encouraged some businesses and professionals to file as individuals) have reduced the corporate share of the nation’s tax receipts—from 30 percent of all federal revenue in the mid-1950s to less than 7 percent in 2009.

Peter Drucker had a simple remedy for this: Blow up all the shelters.

“The locus of decision making in the political process is rapidly shifting from politicians and civil servants to lobbyists,” Drucker wrote in his 1989 book The New Realities. “No one yet knows an antidote to the political disease of single-interest pluralism.”

But, he added, “there may be ways to assuage it. One such treatment—it would be quite effective in the U.S.—would be a change in the tax system so that there are no tax exemptions, no tax breaks, no tax deferments of any kind. Everybody pays tax at exactly the same rate on all incomes above a minimum level. (There might be three rates: zero for the lowest 25 percent of incomes, perhaps 15 percent for the next 50 percent of incomes, and 25 percent for the top 25 percent of incomes.)

“Not all single-cause special interests are concerned with taxes; but a good many are,” Drucker continued.  “And a flat-rate tax system is desirable in itself. It would produce more revenue than any of the present complicated systems, with their loopholes and special preferences, and would be easier and cheaper to run.”

What do you think: Would America be better off with the tax system Drucker described—and, if so, what do you think the odds are of this becoming a reality?