Watch for Falling Taxes

A front page article in yesterday’s Wall Street Journal detailed (and criticized) Wal-Mart’s aggressive accounting methods, designed to minimize its state corporate income tax liability. The company pays an inordinate amount of money to accountants and attorneys to exploit custom-tailored loopholes in state tax codes. So, while the average state corporate income tax is 6.9 percent (on top of the 35 percent federal rate), Wal-Mart paid, on average, 3.8 percent in state income taxes over the past decade.

A lot of people hate Wal-Mart. I’m not one of them. I think the company has done more to provide for low-income families in this country than any government transfer program in history. They’ve provided savings to untold numbers of consumers by focusing on the bottom-line, even if you despise their approach. And I generally find that the harshest critics of Wal-Mart are those with the luxury of having the resources to shop elsewhere.

But the point of the Journal article shouldn’t have been to demonize Wal-Mart and its “aggressive” accounting; instead, it should have focused on the gross inconsistencies in the nation’s tax code. Far too often, state legislators utilize the tax code to protect favored industries and to encourage or reward particular behavior. But this indirect approach simply benefits large corporations, which have the resources to exploit the loopholes and evade taxes, leaving small businesses and individuals with the burden of higher effective tax rates than their wealthier counterparts. This defies any conventional notion of an equitable tax system.

If state legislators would stop using the tax code as their personal “thank you” card to their corporate supporters, then companies like Wal-Mart would be forced to pay a flat tax, regardless of how creative their accounting is. Instead, big-box retailers have every incentive to circumvent the law. And in a high volume/low margin industry such as retail, the only way Wal-Mart can even justify expansion into high-tax states is if they are able to evade taxes and increase their margins.

So maybe instead of criticizing Wal-Mart, we should criticize the state legislatures and their inconsistent tax codes.