More subtly, Warren’s tax would reduce the incentive to take risks. Since companies can now deduct losses from future taxes, it can pay to make a few risky investments. Warren’s tax would only apply to companies making over $100 million in profit and so there’s no provision in it to account for negative income from risks that don’t pan out.
Instead, the real profits tax would encourage companies to structure their finances to reduce GAAP profits in good years and increase them in bad years. General Electric Co. became notorious for using this type of trick, which its executives employed to convince investors that GE was a steadier company than it really was. Giving corporations a financial incentive to copy that type of behavior would reduce transparency and fight the goals the SEC is trying to achieve.
Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.
This column was provided by Bloomberg News.