Wouldn’t Employees Prefer Permanent Tax Deductions to One-Time Holiday Bonuses?

This is the season for announcing year-end employee bonuses. And two days ago, in response to the bonus announcements of several large American corporations, President Donald Trump tweeted:

Our big and very popular Tax Cut and Reform Bill has taken on an unexpected new source of “love” – that is big companies and corporations showering their workers with bonuses. This is a phenomenon that nobody even thought of, and now it is the rage. Merry Christmas!

Indeed, a few firms have explicitly referenced the Trump Administration’s corporate tax reductions in their bonus announcements. Bank of America’s CEO Brian Moynihan, for instance, wrote to his employees:

I want to highlight the December 20 passage in the United States Congress of the most fundamental tax reform since 1986. When the legislation is signed into law by the President, these reforms will impact our company in different ways. For instance, we will see an immediate reduction in earnings as a result of a write-down of the value of our deferred tax asset. Beginning in 2018, we will see benefits from the tax reform, too, in the form of lower corporate tax rates.

In the spirit of shared success, we intend to pass some of those benefits along immediately. U.S. employees making up to $150,000 per year in total compensation – about 145,000 teammates – will receive a one-time bonus of $1,000 by year-end.

At first glance, this would appear to be a very generous gesture. But did you notice the appearance of the phrase “one-time” in Moynihan’s announcement?

It implies that employees should not expect such bonuses in the future. The reduction in the corporate tax rate, however, is a permanent one.

That raises an interesting public policy question. If President Trump and the Republican Party wanted to shower workers with “love,” shouldn’t they have redirected a portion of the corporate tax cuts to employee tax reductions?

In other words, if these bonuses were designed to serve as pass-throughs of the employers’ new tax benefits to their workers, shouldn’t the federal government have simply reduced the payroll taxes of those very workers?

That way, instead of merely enjoying a one-time bonus, employees could have joined their employers in enjoying permanent tax benefits.

Indeed, any rational employee would prefer a permanent tax reduction to a one-time holiday bonus. But for some reason, President Trump and the Republican Congress decided against sharing their “love” in this manner.

A Tax Perversity

You may believe that all corporate tax disputes are alike. After all, a dispute generally begins when a firm calculates its liability. Then it forwards a tax payment to a government treasury office.

So what usually happens next? The treasury office assesses the underlying calculation, determines the payment to be insufficient, and demands more money. The company then disputes the assessment and files an appeal in tax court.

That’s not an unusual scenario, is it? But sometimes scenarios do vary. Earlier today, for instance, Apple filed an appeal with European authorities over a tax liability that a government treasury office refuses to collect.

Huh? A treasury office that refuses to comply with its own government authority? How is that possible? Although it’s an incongruous situation, it starts to make sense when one realizes that the government entity hearing Apple’s appeal is different than the government entity that is refusing collection.

You see, the European Union is hearing an appeal about a tax payment that it ordered to be paid to the government of Ireland. Although the Emerald Isle is a member of the European Union, it maintains its own treasury office, independent of the Union. That relationship sets the stage for conflicts of interest between the two government entities.

In this situation, the Irish have been accused of establishing a tax haven for global firms that wish to do business within the European Union. By offering American, Asian, and other firms a foothold in the Union at a lower corporate tax rate than is offered by other E.U. nations, the Irish attract many global business offices and thus broaden their economy.

This puts the European Union in the uncomfortable position of having to level the playing field between its member nations by insisting that each nation maintain comparable levels of corporate taxation. Last year, E.U. regulators found that Ireland was under-taxing Apple, and ordered the Irish to collect over $15 billion in back taxes.

$15 billion, of course, is a major sum for any nation. And for a small country like Ireland, it’s a stupendous windfall. Yet, in order to defend its right to establish such tax arrangements with other global firms, the Irish government has joined forces with Apple to fight the Union’s tax determination.

Win or lose, it certainly is a strange sight for a relatively small government to wage a vigorous battle to avoid collecting billions of dollars in taxes, isn’t it? Indeed, the situation illustrates the perverse incentives that are at play within the Union.

Regardless of the merits of the European Union’s case, one cannot help but wonder whether its tax policy is a bit misguided. After all, every nation in Europe may benefit if the E.U. spends a little less time prosecuting its own member nations for failing to collect taxes, and a little more time trying to eliminate the contradictions that generate such perverse incentives to begin with.