Eliminate the Corporate Income Tax?

Yeah, I’m interested in what all of you have to say about this. I’ll be blunt – I’m all for this. I feel that a genuinely entrepreneurial culture can help America greatly, even though I can conceive of other sorts of “regimes” that would be good but have different values.

The article for discussion is Jeffrey A. Miron’s “Economic Change We Can Believe In.” Highlights:

From the efficiency perspective, the corporate income tax has never been sensible policy. Economic theory holds that an efficient tax system should not tax capital income, since this distorts the incentives to save and invest. Even if the tax base includes capital income, corporate income taxation is overkill. All income earned by corporations accrues to households as dividends or capital gains, and this income is then taxed by the personal income tax system.

Not only is corporate taxation bad in theory, but if you’re worried about some people making too much money:

[The] desire to redistribute income can still be achieved using the personal tax system. That approach is better targeted than taxing corporate income, since many low and moderate income households own corporations via their pensions and 401(k)s. The true burden of corporation taxation falls not just on stockholders, but on employees through lower wages and on consumers through higher prices. Thus corporate taxation hits taxpayers across the income spectrum.

Corporate income taxation has other negatives. It requires a complicated set of rules and regulations, over and above the personal income tax system, generating compliance costs. Special interests ensure that corporate tax systems favor specific industries or activities, further distorting private investment decisions. Along those lines, corporation taxation reduces financial transparency, making it harder for investors to monitor corporate behavior.

I think that’s a good enough starting point for a discussion. If you have other articles you think should be considered, by all means, link away in the comments (although my spam filter will more than likely give you trouble, so give me a heads up if your comment gets caught).

9 Comments

  1. I agree that the Corporate Tax Should be eliminated.
    I think that All Taxes should be eliminated and replaced by a % flat rate tax. All dollars turned by any one corporate or wage earner would be taxed at 15%. Every one would be able to deduct the Poverty level . Anything above Poverty level would be taxed. This would give the Taxpayer 85% of their money to spend thus stimulating the Economy. This could be done without nearly as many IRS employees and the cost to the Government would be reduced.

  2. @ David – Yeah, it’s important to think how government can reasonably be cut too, and it’s great you brought that up. People who can crunch numbers and work through layers of arcane rules will be fine in the private sector, and one less layer of bureaucracy would probably make things a lot more efficient overall.

  3. I’m not really gonna offer a novel perspective, but I’ll say. I think double taxation is nonsense. Corporate income is going to make its way into somebody’s individual income. And I agree completely with David- there was a time when I’d stubbornly say NO TAXES period, but I knew that was never reasonable, at least unless we decided to divide up into tiny self-ruling villages, and well, that’s not gonna happen. A flat percentage of income over poverty level- and right now we’d need to do some serious thinking as to what that level should be- would be completely fair. If that leaves us with not enough money to pay for government programs, then we shouldn’t have those programs. I really want a new camera among other things, but I’m not managing to pull in enough money to buy the kind I want… so I’ll have to do without or settle for something much cheaper. That’s kind of the way it should work.

  4. I think we should eliminate all forms of income tax. People should not be penalized for working hard.
    I support the Fair Tax, because it gives the individual complete control over their tax burden. Consumption taxes also generate money from people who would not otherwise pay taxes: independently wealthy people with no income, illegal aliens, international tourists, all income groups.All of these people benefit from some kind of government service whether it be social programs or just use of public roads and facilities. The Fair Tax also has the added benefit of putting the government on a budget. The next time they want to raise taxes, they have to appeal to everyone.They can no longer pretend the evil rich will be picking up the tab.
    Of course, this need to replace all income taxes and restructure the IRS, so we don’t end up paying both.

  5. One of the primary weaknesses of the Articles of Confederation was the government’s inability to tax. A few basic citizenship taxes make sense in a representative gov’t–money to provide for National Defense and for building and maintaining infrastructure. I agree with those above that consumption tax makes the most sense (…but I did enjoy living in DE for a few years with no sales tax!)

    Corporate income tax makes no sense to me.

  6. I agree we should eliminate corp taxes they hamper economic growth when we need it most.. But we have a better chance at me being Superman. Until we elect like minded peoples or convince those who already think they know it all we are just going to have to deal with it.. or Protest? What do you think?

  7. @ John Ashby: All I think is this – the argument from incentives, regarding double taxation, needs to get out there.

    If people want to argue “you can talk about double taxation all you want, the fact is the rich are too rich,” they need to be pushed to make the case empirically and practically. In other words, they can’t just go around blaming big corporations for all the evil they make up. They have to be specific, get the statistics, and also demonstrate the real harm being done.

    There are lots of Left-leaning documentaries out there that a few educated, liberal people watch, as well as some solid liberal publications. Our job has to be to force those on the Right to make the best argument while getting the Left to go to their best sources.

    In a more deliberative climate, where class rhetoric isn’t as heated or imaginary, corporations will have fewer penalties for existing, but perhaps be accountable for a lot of other things they’re getting away with.

  8. For years now it has driven me bonkers that we have a corporate income tax in this country. From an economic perspective the sensible way to tax corporate profits would be to 1) eliminate the corporate income tax, 2) lower the capital gains tax to 10% (or thereabouts), and 3) increase the tax on dividends to the ordinary income rate (or higher, if necessary). There needs to be a capital gains tax if there is a dividend tax since, otherwise, there is a incentive for corporations to inefficiently (from an economy wide perspective) delay paying dividends due to the time value of money.

    The reasons such a comprehensive policy makes sense from an economic perspective is that it would encourage US multinationals to repatriate foreign profits and it would encourage foreign investment in the US. It would also eliminate the waste from economically inefficient investments that are designed to create tax benefits rather than real economic benefits and it would eliminate the need to pay professionals for costs tax advice. Plus, the corporate tax code inefficienty discriminates against capital intensive projects with long time horizons. The economy would save hundreds of billions a year by enacting these reforms.

    Even better, in the short run, such a policy would increase liquidity and rapidly increase the demand for labor. That would help alleviate the current job crisis and the liquidity crisis simultaneously. Liberals should even like the policy since it would be a more progressive way of taxing capital income than the current system.

    Unfortunately, the government will probably never enact such a sensible reform to the tax code. Over the last few decades, the government has realized that while the public detests subsidies, they don’t object to targeted tax breaks. Even though subsidies and tax credits are identical from an economic perspective, the public views them differently. At some point, our government realized this and decided to use the tax code to plan the economy centrally. Although the coporate tax rate in the US is 35% virtually no businesses pay anywhere near that. The reason is that the tax code offers them plenty of deductions and credits for engaging in what the government deems to be socially beneficial activity (i.e. pleasing to special interests). The government knows that the corporate income tax is its most effective tool for controlling business. Unfortunately, I believe that makes the prospects for a rational corporate income tax policy extremely dim.

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