A Fair Income Tax on the Trillion-Dollar Behemoths

The first source of tax revenue in coming times of need should be an increase in the tax on undertaxed things. We should especially end the trillions of dollars in tax subsidies given to our trillion-dollar behemoths, Apple, Amazon, Microsoft, and Google,¹ which arise because they deduct their intangible investments immediately, when their investments have not expired. As Table 1 shows, our Big Four trillion-dollar market-capitalization companies pay effective tax rates at trivial levels, ranging from 0.65 percent of economic income for Apple to a “high” of 2.9 percent of economic income for Google.

Table 1. Effective Tax Rate for Trillion-Dollar Market-Capitalization Companies^a

	(1) Market Cap (in trillions)	(2) Price/Book	(3) Basis as Percentage of FMV = 1/(2)	(4) IRR Reducing Effective Tax Rate = 21% * (3)
Apple	$2.16	29.15	3.11%	0.65%
Amazon	$1.67	19.38	5.32%	1.1%
Microsoft	$1.88	14.58	6.76%	1.4%
Google	$1.57	6.5	13.79%	2.9%
Sum	$7.28
aThe market capitalization and price/book value ratios in columns (1) and (2) are from Fidelity.com research, accessed May 7, but the information is also readily available from alternative sites. The logic of Table 1 is explained more patiently in the body of this article, but briefly, book value is used as a proxy for tax adjusted basis. The reduction of pretax internal rate of return (col. 4) is basis/fair market value times the 21 percent statutory tax rate.

The Biden administration’s tax package would not affect the tax treatment responsible for the low effective tax rates in Table 1, but it would reduce the benefits the Big Four now receive from foreign tax havens.

Defending the tax base by increasing taxes on what are now low-tax transactions can improve both the efficiency and fairness of the system. Increasing tax rates across the board, by contrast, decreases efficiency because it increases the incentive to avoid tax by real changes or mere accounting claims. Before we raise the overall statutory rate, we should fix the effective rate of the taxpayers who develop intangibles, to get them up to the current 21 percent corporate tax rate.

A reasonable alternative to the Biden tax package would be to keep remedies against the exploitation of foreign tax havens, but to raise revenue otherwise by capitalizing intangible investments and correcting the past error of allowing the deduction of costs that have not become worthless by year-end. Bringing these high-tech companies into the income tax is a deep-pocket source for revenue with more than enough to fund whatever government expenditures are called for.

Apple, Amazon, Microsoft, and Google pay tax at such trivial rates because they immediately deduct — that is, expense — substantially all their investment costs. In a normal income tax, costs that have continuing value beyond the end of the year are called investments and they create basis, and are not deductions until the investments are sold or expire in value. The stock market in setting a market capitalization says these four companies have made investments with continuing value of over a trillion dollars each — more than $7.28 trillion for the Big Four combined. The public stock market is a smart market composed of thousands of experienced, smart, and highly motivated bidders who estimate value every day and convey their found value to the market. Even when the public stock market errs, it has no serious rival as the best judge of value we have. Current tax accounting allows an immediate deduction for intangible investments because they cannot be seized and sold except as a part of the underlying business as a whole.² This treatment means that the accounting profession has withdrawn from assessing the economic position of companies in the new economy that develop intangible values. The smart market appraisal of the $7.28 trillion value of the Big Four’s investments is right, or at least the best that any mortals can do about predicting the future. The claim of tax and financial accounting professionals that these costs are worthless — money immediately down a rathole as soon as they are made — is not a responsible assessment of the economic well-being of these corporations.

The ability to expense the cost of an investment that has continuing value means that tax does not reduce the pretax return from the investment. There is a great deal of tax activity inside the companies — tax deductions at the outset and tax paid at the back end of the investment. But the combination of front tax savings and back-end tax offset each other in present value terms no matter what the tax rate or pretax profit, and leave the pretax returns unreduced. The thesis that expensing means no reduction in pretax return from an investment is a foundational maxim of modern tax economics.³

We can tax the economic income from these companies — that is, the interest-like income or internal rate of return (IRR) from their investments — only if we treat their investments as basis, and not deductible until they are sold or expire in value. The best yardstick of economic income is IRR. Under this yardstick, all investments are analyzed as if they were bank accounts or debt generating an interest rate. The interest rate on a hypothetical bank account, just like the investment being analyzed in terms of cash in and cash out, is the IRR. Technically and synonymously, it is the interest rate used to discount future cash, that makes the net present value of costs and returns equal to each other.

To account for and tax that economic income from intangible investments, we must get adjusted basis up to the real value of these investments immediately. For the Big Four, the theory of tax on economic income requires a tax of more than $1 trillion now on the $6.78 trillion difference between low basis and high value.⁴ The IRR reducing effective tax rate measures how far tax reduces the pretax IRR: (Pretax IRR - post-tax IRR) / Pretax IRR. Effective tax rate, unfortunately, has several other meanings in acceptable English, which are not of help in analyzing the economic impact of tax.⁵ The IRR-reducing effective tax rate is a staple of tax economics.⁶

For publicly traded companies, getting basis up to real value requires only a trivial administrative effort. The market capitalization that represents the best estimate of thousands of smart, sophisticated, self-serving bidders is published daily in multiple sources whenever the stock market is open.

Under current Treasury regulations, the Biden administration can require capitalization of expenses with continuing investment value by the publication of notice in the Federal Register, disallowing expense deductions until the adjusted basis for the firms’ investments gets up to the $7.28 trillion value mark.⁷ Congress need not participate. If Congress reaches a stalemate, a solution to revenue needs by regulation is legitimate.

Within these four companies alone, expensing essentially now pulls market value of $7.28 trillion into a world substantially immune from tax. With seven trillion dollars here and seven trillion dollars there, we are talking about real money. With such exempt spheres, one can tax neither the wealth of this nation nor its wealthy who own it. The problem of undertaxation that arises from expensing extends way beyond the four largest corporations, but if you want to understand how bad the situation is, the essentially untaxed status of the behemoths is a great place to start.

I. Expensing So Returns Untaxed

To illustrate how expensing leaves returns untaxed, assume a $100 investment that triples in value over some unspecified period. Assume a 40 percent tax rate. Deduction of the $100 invested saves tax of $40 at the outset and reduces its cost to $60 after tax. The $100 triples in value to $300. Because the $100 cost was deducted at the outset, the cost is not used again and the full, final $300 revenue at exit is subject to full tax. The 40 percent tax on $300 reduces the after-tax proceeds by $120 to $180. Still, the $180 after-tax return is the same tripling of the $60 after-tax cost that the taxpayer achieved in the absence of tax. Tax has not reduced the taxpayer’s triple rate of return.

If the taxpayer wants a $100 investment after tax, rather than just $60, then the taxpayer can gross-up the $100 investment to $166.67, relying on the upfront tax savings to reimburse 40 percent of the $166.67 investment immediately. The 40 percent tax savings on $166.67 is $66.67, which reduces the upfront after-tax cost back down to a pretax $100.⁸ The tripling of the investment turns $166.67 into $500, and tax at 40 percent then brings the after-tax return down to $300. With the gross-up, tax changes neither the tripling nor the $100 turned into $300 that was the situation in absence of tax.

Availability of upfront tax savings that so reduce the after-tax cost of investing requires that the investing taxpayer has income from some source that would otherwise be subject to tax, here at 40 percent. If the taxpayer has $100 or $166.67 taxable income subject to 40 percent tax, the expensing acts as a tax voucher — or a get-out-of-jail card — that makes tax go away. Treasury does not, however, ordinarily give tax refunds for reported tax deductions, so the deductions need to find some taxable income to shelter to have any value. If a company does not have taxable income to make the expensing have value, it needs to be organized as a passthrough to give the expensing deductions to owners outside the investing entity who can use the shelter.⁹ The use of the expensing deduction is no problem, however, for Apple, Amazon, Microsoft, and Google, which are mature companies with plenty of taxable cash flow to shelter. They have no trouble finding the tax savings that maintain the triple returns available in the hypothetical in the absence of tax.

The equivalence of expensing to no reduction of pretax return can be generalized by algebra to any rate of return or tax rate.¹⁰ Thus, increasing corporate tax rates from the current 21 percent to 28 percent or indeed to higher past corporate rates of 35 percent or 52 percent, will not affect the after return of high-tech companies. Indeed, if the investment is deducted in a higher tax rate than the rate applied to the returns, the combination of expensing at the start and tax at the end will be a negative tax; that is, the taxpayers’ returns will be better by reason of a tax system than without it.

II. Weighted Average Tax Rate

The Big Four do make some investments with nondeducted, after-tax “hard money” amounts, which become adjusted basis. But their hard money investments are a very modest fraction of the value of all their investments, as the stock market judges value. We can find a weighted average tax rate treating each company as if it were two segments, one made up of entirely expensed or soft money investments and the other made up of hard money basis-generating investments. The weighted average of the two segments, one taxed at a zero effective tax rate and one at the statutory tax rate, will then be the tax rate for the whole company.¹¹ The weighted average for each of the trillion-dollar net worth companies is displayed in column 4 of Table 1.

The book value of a company’s assets is a reasonable proxy for a company’s adjusted basis in its assets. The recent highly accelerated write-offs for equipment have meant tax-adjusted basis has dropped below the nontax financial accounting’s asset balance for depreciable property. Still, the Big Four behemoths do not own substantial enough amounts of equipment to disrupt use of book value as an approximation of basis. If they did, the companies would have an even lower, IRR-reducing effective tax rate than I have measured, reached here by using book value as a proxy for adjusted basis.

Apple, for example, has a weighted average effective tax rate of 0.65 percent. Apple has an investment value at $2.16 trillion, by market assessment, which is 32 times greater than its book value. Only 1/32 or 3.1 percent of Apple’s investments are represented by still nondeducted hard money adjusted basis. Conversely, 96.9 percent of Apple’s investments are soft-money expensed investments which benefit from no reduction of pretax return. Weighting the 96.9 percent soft money segment, taxed at a zero effective tax, and 3.1 percent hard money investment segment, taxed at the statutory 21 percent tax rate, yields an overall tax rate for Apple as a whole of 3.1 percent of 21 percent, which is 0.65 percent. An effective tax rate of under 1 percent of IRR-economic income is not much for the most valuable company in the world.

III. Shareholder Capital Gain

Corporate profits also produce shareholder capital gain, but the shareholder tax on the behemoths is similarly modest. Three-quarters of publicly traded stock is held by entities that do not pay domestic capital gains tax,¹² and three-quarters of the accrued capital gains estimated by nontax sources are swept into death and never taxed.¹³ Discounting the expected shareholder tax because only one-quarter of shareholders are taxable and only one-quarter of individual capital gain is realized before death yields an expected value of shareholder tax of 25 percent times 25 percent of the statutory 20 percent capital gains rate, or 1.25 percent. That modest expected value of shareholder tax is not enough to make up for the undertaxation at the corporate level.¹⁴ Shareholder tax also does not differentiate between highly taxed corporations with a true 21 percent effective tax rate and the undertaxed tech companies, so it does not reach toward more equal taxation.

IV. Tax on IRR Is Normative

Apple, Amazon, Microsoft, and Google should be subject to tax on their economic income or IRR at the statutory rate that Congress decreed when it thought about tax rates. People think about tax as if the stated rate were real; that is, as if the behemoths were paying tax at 21 percent on their pretax economic income rather than the 0.65 to 2.9 percent IRR-reducing effective tax rate that they in fact pay. A tax on IRR that is less than the statutory tax rate is a subsidy or tax expenditure, a departure from the norms of taxing income, which should be justified by a cost-skeptical intelligence trying to get the best product from the least government cost. Subsidies that do not pass scathing review should be abandoned.¹⁵

Economic income or IRR is the interest-like income from an investment. IRR analyzes every investment by a yardstick as if it were a bank account or other debt and translates every return as if it were an annual interest rate. IRR allows comparison of very diverse kinds of investments with a common yardstick.¹⁶ The IRR-reducing effective tax rate answers the question of by what percentage has tax reduced the pretax interest rate to an after-tax interest rate?¹⁷ Effective tax rate, unfortunately, has several other meanings that are not of help in analyzing the economic impact of tax,¹⁸ but the IRR-reducing effective tax rate is a staple of tax economics.¹⁹

Getting IRR-reducing effective tax rates up to the statutory tax rate has several shining virtues. Our taxation of debt ordinarily allows interest to be deducted because interest is a per se current expense, that expires as soon as the rental period the interest covers has passed. But if interest is deductible, then the interest-like income from the investment funded by borrowing must be taxed or the accounting will generate artificial tax losses — accounting ghosts that have no connection to the nontax economic world. Higher-bracket taxpayers pay more for undertaxed investments and accounting ghosts than low-tax or tax-exempt taxpayers do, so that if tax does not reach IRR, then the rich have a thumb on the scale that lets them own the assets even if they are inferior owners in absence of tax. Taxing IRR is the only system that makes ownership indifferent to tax bracket.²⁰ Taxing IRR means that tax reduces the pretax economic return by the rate that our Congress set when it was thinking about appropriate tax rates.

To tax economic income at the statutory tax rate, now set at 21 percent, the tax system must simultaneously bring the adjusted basis for these assets up to their true value. IRR identifies the interest rate that is like that on the investment under examination. To identify the interest rate, one must simultaneously identify the balance on the hypothetical bank account that matches the investment. The bank account balance must have been subject to tax and not yet deducted; that is, the adjusted basis must be equal to the remaining present value of the investment, using IRR as the discount rate. To bring the effective tax rate on Apple, for instance, up to the statutory corporate tax rate, now at 21 percent, we need to capitalize Apple’s costs until it has a basis equal to its current $2.16 trillion value or mark the intangible assets to market value and impose an immediate tax to get to a $2.16 trillion basis.

In a tax that reaches true income, a taxpayer makes and continues investments only with hard money that is post-tax basis, not soft money untaxed amounts. Savings and investments are made, in an income tax, from post-tax take-home pay instead of untaxed gross pay. Savings and investing provide basis, not losses, as long as the costs have not declined in value. Within the norms of a general income tax, expensing or indeed dropping later basis below investment value gives an incentive to invest in inferior investments or gives high-bracket taxpayers a low tax rate, or both. The expensing of intangibles is a bad idea on its own merits.

The accounting profession explains the need for capitalization in terms of the fundamental principle of matching costs against the revenues that they produce.²¹ Costs that have expired are deducted against current income, but costs that have continuing value are called assets by standard accounting and they are put on the balance sheet to be matched against future income. Deducting the costs of investment at the outset but reporting the revenue in a future period does not reflect income — a fundamental accounting sin — because the expenses are not netted against revenue to produce a net or profit figure that is a fair sample of how the company is doing. The Behemoth corporations violate matching because they deduct investment costs in one period and report the resulting revenue in another one.

Expensing of intangibles arises from an accounting convention inconsistent with matching that makes financial accounting unable to describe a new economy made up of intangibles. Fundamental accounting principles require that costs be matched against future income if they will produce the future income by capitalizing the costs as assets — that is, basis. But accounting departs from the matching principle into an under-principle convention when it insists that assets on the balance sheet describe good collateral. The accounting profession arose to protect creditors, and creditors want balance sheet asset balances to describe collateral that can be seized by creditors if things turn sour. Amazon has a purchase of goods system worth $1.67 trillion, but there is nothing in it that can be seized as collateral apart from the business as a whole. So Amazon has a zero-asset balance for its marvelous purchasing system for financial purposes as if it were worthless junk. Tax accounting follows suit. The capitalization regulations now in effect, as noted, do not require capitalization if the investment produced by the expenditure cannot be sold apart from the underlying business, even if the costs have continuing value beyond the year-end. The smart market appraises Amazon’s investments as worth $1.67 trillion and has it right, or at least the best anyone can tell about the future. Tax and financial accounting valuing Amazon’s system at zero is in error at a very serious level. Current accounting regulations, however, do allow Treasury to require capitalization of costs with value beyond the end of the tax year, by mere publication of amended regulations.

V. Subsidy?

One should be skeptical of the claim that expensing is a necessary subsidy to innovation, in part because the great innovating pools, the Silicon Valley venture capital funds, burn the upfront deductions by trapping them inside non-passthrough C corporations that cannot use the deductions because they have no income.²² If upfront deductions were a subsidy considered to be of any value to Silicon Valley, the funds would use passthroughs to find investors who could use the deductions, and not C corporations. The potentially groundbreaking start-ups in the portfolio of a venture capital fund are organized into a pool with many high-risk ventures with high potential. Most of those portfolio ventures fail, but one explosively successful portfolio venture can make up for many lost ones. Venture capital funds, however, burn their upfront deductions, which would provide desperately needed upfront capital at the tax rate that expensing exploits and would yield the result of no reduction of pretax return by trapping the deduction inside a corporation that does not have income, and probably never will have income, so that the deductions disappear unused when the portfolio company changes hands, sells its assets, or disappears.

If we view the deduction of intangible investments as a subsidy, moreover, subsidies need to be brought out of the tax system and into a government spending system to reduce waste and maximize productivity. A tax expenditure is a departure from income taxation that amounts to government spending, but tax expenditures have never had the necessary care given to them to prevent government waste in that spending. Government subsidy spending needs a review that would ensure the money is not being wasted on projects in which the benefit of the subsidy is less than its costs. The subsidy must be justified by externalities that a firm cannot charge customers for. Subsidy analysis needs to make sure there is no better project available nor better way of going about it. Subsidies need to be applied with human intelligence.

Some of the costs spent by the biggest tech companies are undoubtedly well worth subsidies. By way of illustration, the $1 million that the government spent on the Advanced Research Projects Agency Network (ARPANET), the precursor of the internet, has generated a return on investment to the economy as a whole worth many times its cost.²³ But some of the costs of companies that develop intangibles should not be subsidized. Intangibles like Facebook or the shoot ’em-up games like Doom IV are consumer recreation, much like golf clubs or pulp fiction. The consumer demand means they are not evil things, by and large, but they do not give multiple-value free rides like those from great innovations. Amazon has dramatically reduced the cost of purchasing consumer goods, but the consumer goods sector should bear ordinary tax, not zero effective tax. Investments that are likely to require only the application of the state of the art should be taxed under the ordinary income tax. Expenditures with a private return from consumer demand but not enough externalities to justify the government cost need to be subject to ordinary income taxation and not given a subsidy.

But who knows? There is no budgeting, accounting, or auditing, and no cost-benefit weighing of any of the trillion dollar tax expenditure created by the Big Four’s expensing. When the government wants to subsidize something, its criteria are quite strict. The National Science Foundation, for instance, has in one sample period funded only 22 percent of the excellent projects submitted to it.²⁴ Applicants know that the competition is fierce so they bother to apply only when they have exemplary proposals. The NSF invites “high risk, potentially transformative projects that will generate path-breaking discoveries and new technologies.” One must apply human intelligence to identify research that is likely to give lasting value beyond its immediate customers. If the product gives no value beyond the immediate customers, the income it generates needs to be taxed just like any income. Very little if any of the Big Four’s expenditures would qualify for an NSF grant, I would surmise.

Under current expensing law, an inappropriate accounting convention considers the costs expired or worthless by year-end because they cannot be seized as collateral. This accounting determination of worthless by year end is not a very good filter for finding investments capable of transforming the state of the art and capable of generating externalities justifying a government subsidy. If they are worthless by year end, as accounting claims, they merit no subsidy. If they have value beyond the year, they should be capitalized. Subsidies delivered by expensing are also illegitimate because they are not evaluated by a budget, and not transparent to the democracy. Indeed, it is clear that if the government would collect $1 trillion from the Big Four and give it to the NSF, it would achieve a far better use of its money.

In any event, to reach economic income and reduce it by the stated tax rate, the amount invested needs to remain within adjusted basis and not deducted until its value disappears.

VI. Biden Proposals

The Biden administration has proposed a package of tax law changes raising $2.5 trillion in taxes over 15 years.²⁵ Except for the proposals limiting foreign tax havens, however, the package would leave intact the trivial effective tax rates accomplished by high-tech companies including the Behemoth Four.

The package proposes to increase corporate tax rates from the current 21 percent to 28 percent. Expensing, however, entails no reduction of pretax IRR no matter what the statutory tax rate: The upfront tax savings still have value equal to the tax ultimately paid.²⁶ The effective tax of the Big Four would still be trivial. The higher rate would increase incentives for other companies to avoid tax, by hook or by crook, but will not reduce the pretax returns of the behemoths.

The package also proposes a “bragging tax” of 15 percent on large differences between taxable income and the book and higher financial income reported to shareholders under nontax book or financial accounting. Immediate write-offs of costs for developing intangibles are the rule for both tax and financial accounting, however, so that there would be no higher income reported to shareholders than reported to the IRS and no 15 percent bragging tax.

Overall, moreover, a tax on financial income is not a good idea because financial income is so elastically responsive to tax. Companies can find ways to report their economic well-being outside the official financial statements. The tech sector has succeeded in attracting investment in the face of financial statements that do not reflect their economic situation. Still if financial accounting still serves some social value, a tax on it will suppress it, and perhaps make it disappear.²⁷

The Biden proposals, however, would also appropriately restrict high-tech companies’ exploitation of foreign tax havens. A standard tax planning goal of international tax is to deduct the costs of development for an intangible domestically but report the revenue from the tangible in a foreign subsidiary set up in a country that has no (or trivial) corporate tax. Income of the foreign tax subsidiary is taxable to the domestic parent when the income is repatriated to the United States as a dividend. Still, repatriation of the revenue can be delayed indefinitely and reinvested in other projects. That expands the value of the no-pretax rate reduction to cover not only the returns from the initial intangible investment but also returns from the subsequent indefinitely long, unrelated investments overseas made with the earnings from the domestically deducted investment. Congress has and may forgive tax on repatriation or the repatriation can be timed for a low bracket year, which yields a negative tax better than an exemption. Sometimes the tax planning works and sometimes not.²⁸ The Biden administration’s tax package would impose a minimum tax on tax haven income, which would reduce but not eliminate all the advantages of assignment of the revenue to lower-tax subsidiaries.

Getting high-tech companies, including the behemoths, to bring basis up to value is a better tax idea than either raising rates or imposing the tax on book income. Ideally, the Biden administration would let remedies to bring basis up to value replace the rate increases and the tax on book income.

VII. Quick or Delayed Correction?

As a matter of theory, in an income tax that reaches and taxes real economic income, investments produce basis that is previously taxed and not deducted. The basis of the Big Four in their assets needs to be raised to market price of $7.28 trillion this year if the economic income of the trillion-dollar companies is to be taxed at statutory tax rates this year. A basis of say, only half of the real investment value, means that the effective tax rate would be only half of the statutory tax rate.²⁹ The market price of the Big Four is roughly $6.78 trillion higher than adjusted basis. Basis is achieved by taxing the $6.78 trillion and then increasing basis by the amount taxed. The Behemoths need to pay over a trillion dollars in tax immediately.

Under the tax benefit rule, moreover, a deduction needs to be reversed into income when an event inconsistent with the original deduction occurs.³⁰ Expenditures are appropriate deductions only because they are expired or lost costs. The continuing value of these expenditures, proved by the $7.28 trillion market capitalization, is inconsistent with the original deductions. The not-lost deductions need to be reversed into income. The reversal into income under the tax benefit rule would not retroactively take away the deductions in the year originally made, which would require interest to be charged on the earlier tax savings, but the rule applied here would reverse into income the full amount of prior inappropriate deductions immediately. With taxable income at the level of $7.28 trillion this year, even the largest corporations would probably need to pay their trillion-dollar tax burdens with stock or debt, having a present value equal to tax due, which seems to be a reasonable accommodation.

The trillion-plus dollar tax under the tax benefit rule would not be a retroactive tax. Income tax on corporations has been constitutional since 1909 and tax basis rather than tax deduction of investments is an inherent feature implied by the taxation of economic income at least since the first adoption of an income tax. From the start of accounting, costs of continuing assets have not been subtracted from current income but deferred to match future revenue. The trillion-dollar tax would not be a new tax on wealth, but rather a necessary feature implied by the meaning of income. Indeed, the proposed $7.28 trillion income is a mere accounting adjustment: reversing into income deductions erroneously taken on the ground that they were expired costs, when it is now clear that the expenditures had not expired but had continuing value.

While the immediate correction of a past error is the best theory, driven by the need to tax this year’s income under income tax norms, an alternative remedy is to capitalize expenditures until basis reaches the $7.28 trillion market capitalization value of the companies’ assets. The companies have enough expenditures, now deducted, but properly capitalized to get basis up to value eventually. By a seat-of-the-pants calculation for Google, the basis of its total assets would rise to value by disallowing expense deductions over the next roughly 10 years.³¹

Bringing intangible investments into the income tax has the potential of raising much more revenue than the Biden administration needs now for investment in infrastructure and other reasons. The trillions that could be raised from the Big Four behemoths alone this year is almost half of the $2.5 trillion the administration is asking for over the next 15 years. The problem of intangible investments worth more than basis pervades the economy, far beyond the behemoths. Companies with valuable trademarks, including Coca-Cola and Dell; pharmaceuticals; movie producers; oil and gas explorers; and all computer app developers have assets with trivial basis but high value. One should never ask for more tax than is needed. The absence of need means the full potential of the capitalization of intangibles need not be tapped but can be kept in reserve for future needs. With less need than intangibles can supply, it makes sense to go after only the largest publicly traded corporations at first and allow a longer delayed reversal into income of the value-basis difference for others.

VIII. Implementation Issues

A. Basis as a Whole

In implementing either remedy — full immediate reversal into income or delayed capitalization of costs — all of Google’s basis should attach to a single asset. Market capitalization gives value only for Google’s investment as a whole and it would be quite hard to identify separate assets apart from whatever Google has as a whole. Handling recovery of basis on Google assets as a whole would be easy, using market capitalization. Google would be allowed to recover its basis as market capitalization shows that the value of the whole-company asset has declined.³²

B. Tax Exclusive Tax Base

There will be a converging feedback loop because the smart market will know that a 21 percent tax is coming and will drop the valuation of the companies by the coming tax. Only the after-tax value will be subject to tax. But then the reduced value will reduce the tax. So in another loop, the reduced tax will increase the value partway. The series of alternating plus and minus terms converges quickly to a stock value that is 82.68 percent of the pretax value, and a tax that is 17.32 percent after the feedbacks. That feedback loop means that with a $6 trillion tax base, the tax will be $1.04 trillion, not the $1.26 trillion revenue that 21 percent tax without feedback would imply. The general formula taking account of the feedback loop is T_F = t/(1 + t), where T_F is the tax burden after feedback and t is the statutory tax rate.³³

Taxing by looking at the stock market value of the intangible investment has the perhaps nonobvious effect of turning the tax from a tax-inclusive base to a tax-exclusive base. The U.S. income tax is generally tax-inclusive, meaning that taxpayers pay tax on an amount that includes the tax itself. Taxable wages, for instance, are gross pay, not the after-tax take-home pay. But if the base is fair market value, to include the detriment to value of the tax itself, then the tax itself disappears from the tax base. The general formula, T_F = t/(1 + t), is the general description of the relation between a tax exclusive tax base and a tax inclusive tax base rate.

To maintain the status quo with a tax-exclusive tax base, the rates have to go up. The status quo is a 21 percent corporate tax. If that is defined as the goal, the nominal statutory rate needs to be raised to 26.6 percent.³⁴ The nominal 26.6 percent is just a continuation of the current statutory 21 percent corporate rate, under feedback and the tax-exclusive tax base. Unfortunately it is an increased marginal rate and will increase the incentives of other corporations not benefiting from expensing to avoid tax.

IX. Without Participation of Congress

Under current regulations, Treasury may require capitalization of expenditures that have continuing value beyond the end of the year merely by publishing amended regulations in the Federal Register.³⁵ Capitalization could be achieved without congressional participation. Full reversal of $6 trillion into income in one year under the tax benefit rule could also be achieved without legislation because the tax benefit rule is a routine judicial doctrine. This Congress might well be kept very busy this year with other aspects of the Biden administration’s tax package. If Congress stalemates over some aspects of the package, including things that should not go forward including rate increases and tax on book income, the administration can make up needed revenue by capitalization or reversal into income by amended regulations.

X. Too Much Revenue

The Big Four behemoths are not the only corporations that expense intangibles. The average ratio of value to book for the stock market as a whole is 3.91,³⁶ which is not as high as, for example, the 32:1 price-book ratio for Apple. Still, the 3.9 price to book for the whole market means that on average or roughly a quarter of investments (1/3.9) are made with hard money and just less than three-quarters are made with soft money. The market capitalization of all publicly traded stocks is $49 trillion.³⁷ The soft money roughly three-quarters fraction of that is approximately $34 trillion and a tax on that even at the lower 17.32 percent feedback rate would yield $5.9 trillion, either immediately or over 10 years. The Biden administration’s tax package would raise only $2.5 trillion and over 15 years. The embarrassing problem is that the roughly $6 trillion from income taxation of corporations under fair income tax principles would raise much more revenue than is now needed. It is a nice problem to have, as a matter of politics, but it is a problem that seems to require Congress’s decision on what to do with the excess revenue.

The proposal here would not require entities that are not publicly traded to capitalize costs of developing organization-wide intangibles nor to reverse into income prior expenses to reach basis equal to fair market value. Capitalization is the right result for both private and publicly traded firms. Yet, first, the public market for stock gives an extraordinary confidence that the expenditures for development of intangibles had value beyond the end of the tax year, and indeed tells how far to extend capitalization. For entities not traded on an established market, determining the investment value of the business is not the simple task of just looking it up on-line, but it can in fact be quite difficult. For start-up companies, the value of a firm depends upon speculation about the future, and the future can be very hard to predict. Once a firm goes public, its intangibles can be capitalized. Secondly, publicly traded companies can be asked to pay higher tax than non-traded companies do. A public market allows for a quick sale of stock. Owners can bail out when things turn out less than they hoped. Liquidity for owners is something that an entity would pay for to attract equity investors. A tax roughly equal to the value of liquidity is a defensible tax – as much as the government selling off off-shore drilling rights, national forest cutting rights or grazing rights, or broadcast band rights are defensible sources of government revenue.³⁸ Finally, tax should not exceed tax needs. The $6 trillion extra revenue that can be expected from capitalizing costs of developing intangibles of publicly traded companies seems to be sufficient for now.