April 13, 2020
When he fired the inspector general who would have overseen the bailout fund, Trump made it clear that he fully intends to use the money to advance his re-election campaign, just as he has done with his presidential powers throughout his term in office. While the Democrats ceded their ability to prevent the corruption of the fund (they could have just made rules for how the money would be distributed, with zero discretion – like the small business loan program), they still can act to ensure that there is a limit to the extent that Trump’s friends are able to profit at the expense of the rest of us. They can impose an excess profits tax that would nail the corporations that do especially well in this crisis.
The best route to do this is to require corporations to give notional shares of stock to the government, equal to 15 percent of outstanding common shares, that would be priced at a level halfway between the stock price peak for 2020 and its trough at the worst point of the crisis. These notional shares would convey no voting rights, but the government would get the same return on each of its notional shares as the company’s shareholders get on their shares. This would effectively be a 15 percent tax rate on the returns to shareholders.
The reason for going this route would be it gets around all the tricks that companies have developed to avoid their normal income tax liability. The Trump tax cut package was supposed to be a trade-off where companies paid a lower tax rate (21 percent rather than 35 percent), but that there were fewer loopholes.
While the tax rate was lowered sharply, the loopholes were mostly still there. In 2019, corporations paid less then 11.0 percent of their profits in taxes. Their accountants are every bit as adept as avoiding the new tax system as the old one.
The link between tax and returns to shareholders removes this problem. Companies cannot escape their tax liability unless they also rip off their shareholders. And, their shareholders tend to include powerful people who would likely want to see top management in jail for ripping them off. We should go the notional share route for all corporate taxes, but we can get a big foot in the door with a special excess profits tax.
The way this would work is that the government would get an amount of notional shares equal to 15 percent of total outstanding shares (no voting rights) that would get all the same payouts as other shares. Since the shares would be assigned the value of the midpoint of the stock’s high and low in 2020, this would mean if the peak was 120 and the low was 80, the price assigned to these notional shares would be 100.
From this point, for the next five years, these shares would get the same treatment as other shares. If the company paid a $2 dividend on its other shares, it would pay a $2 dividend on each of the government’s shares. If it bought back 10 percent of its outstanding shares at $110 per share, it would pay the government $110 for 10 percent of its shares, with the government refunding the $100 implicit purchases price (i.e. the government would net $10 on each share).
Since this is only intended to be a way to get excess profits associated with the government bailout, the government’s stake would phase down to zero in three steps, beginning in year six. This means that it would effectively sell back one-third of its notional shares (based on year-round average price) in each of year six, seven, and eight, pocketing the difference between the current market price and $100 ostensible purchase price of each share. This will not fully offset the ill-gotten gains of the Trump family and their political allies, but it would at least be a foot in the door.
(We also need to construct a comparable tax mechanism for privately held companies with revenue above a certain cut-off, like $10 million. We can perhaps target revenue, with the assumption that 10 percent of revenue is profit, and we will tax away 15 percent of this.)
Anyhow, since Congress clearly will not have any oversight mechanism that will prevent Trump from using the bailout money as a slush fund, it can at least propose a route for retaking part of what Trump has given away. The Republican Senate will of course block this, but they can at least be made to pay a political price for giving tens of billions of dollars to Trump’s family and friends.