October 20, 2006

A Patently Absurd Tax Avoidance Strategy

Keen observers of the corporate tax-avoidance practiced by the biggest Fortune 500 companies know that these companies generally aren't ashamed of, or even bashful about, their practices. Rather, they see it as their fiduciary duty to use all available loopholes to reduce their tax liability. And to the extent that these loopholes are the creation of Congress rather than of creative accounting by tax professionals, they've got a point.

But when tax-avoidance strategies are brought to life entirely by the creative efforts of accounting experts looking for loopholes in the law, that's nothing to be proud of. Such loopholes generally only exist until Congress can get its act together and get rid of them. But as Floyd Norris documents in today's New York Times (read it here if you subscribe to NYT online), some companies–in an extraordinary display of chutzpah--are using an obscure 1998 federal appeals court ruling to patent their creative tax strategies. According to Norris, the Patent Office has actually issued 49 patents for corporate tax strategies, following the logic of a 1998 court ruling that business methods can be patented.

This is, of course, absurd. A basic test of a fair tax system is that its provisions treat similar taxpayers the same way. If a legitimate tax break is available to one company, its competitors should be allowed to seek the same tax breaks-- as long as they satisfy the legal requirements for the tax break. As Norris points out, allowing this precedent to stand could transform our tax laws in ways that anyone would recognize as [sorry, bad pun] patently unfair:
[I]f it is legal, the mind boggles at the possibilities. Could I get a patent on taking a deduction for dependents, so that every parent in America would have to pay a royalty to me to take advantage of the tax law passed by Congress?
Like the loopholes themselves, the ability to patent tax dodges is (one would hope) a short-lived phenomenon that will hopefully be reversed by the next Congress. But in the anti-tax environment fostered by our current political leaders, in which the IRS has been hamstrung in its enforcement efforts by budget cuts, seeking a monopoly on tax avoidance strategies is almost a logical next step.


At 3:27 AM, Anonymous Anonymous said...

Hmmm... transformed tax laws that would be patently unfair?" Republicans would LOVE that. Actually, if 'we the people' aren't careful, dems will get to LOVE levying unfair taxes and taking advantage of other pitfalls of power too. But I think the republican thought on taxes comes down to the oft-quoted 'starve the beast' strategy. Unfair and radically altered tax laws are the exact goal. We wouldn't want no activist judges reinterpreting the law any other way, right? Thanks for the article.

At 10:41 AM, Anonymous Anonymous said...

In the New York Times article,the chief financial correspondent writes:

"Could I get a patent on taking a deduction for dependents, so that every parent in America would have to pay a royalty to me to take advantage of the tax law passed by Congress?"

The answer to that question is "no." You didn't invent it. While we might not want to encourage the use of tax loop holes with patent protection, the general rules for patent protection are (i) is it new? and (ii) is it obvious? The first part protects us from the clever NYT reporter patenting taking deductions on dependents, while the second part keeps us from worrying about a rush to patent every new application of the rules of tax law.

If someone has a new, clever way to save money on their taxes that isn't obvious, why is that any less appropriate to patent than a host of business methods by Amazon.com and the like? (You might think that we need to curtail business method patents more broadly, but even that is likely to be a slippery slope towards other method patents - like how to make a mechanical widget - which your insticts might tell you are more deserving of patent protection.)


Post a Comment

<< Home