My Corporate Tax Reform
1. Set corporate tax rate to 0%.
2. Tax all dividends and capital gains on individual returns as regular income (ie no preferred lower rates).
All corporate profits eventually show up on individual tax returns one way or another. There is absolutely no logical reason to tax corporations except out of some kind of progressive hatred of, and need to count coup on, corporations.
My plan eliminates corporate tax preference for debt. Eliminates numerous distortions from political meddling in corporate tax structure. Eliminates double-taxation problems. Eliminates double taxation of foreign corporate income. Levels the playing field between C and S corps. Eliminates the practice of corporations keeping two sets of books (one for tax authorities, one for investors) which is a common practice. Saves a ton of money on tax preparation and compliance, essentially eliminating a whole class of taxes.
Once this is done, then we can start working on simplifying and taking out all the distortions in the individual tax code.
Update: One could go on a length discussing the hypocrisy of the current corporate tax system. Basically it has become a vehicle for each party to reward its favored constituents and punish its enemies. The Obama administration's current tax plan is a great example. Obama wants to reward manufacturers, and manufacturers only, with special lower rates because they are, err, much cooler somehow than other businesses. But it turns out that most of those supposed tax subsidies that Obama proposed ending for oil companies are just the same breaks all manufacturers currently get and he wants to increase. So is he now going to say we need to favor all manufacturers except oil companies with special tax breaks? And he wants to encourage investment and R&D, except in the oil industry (which happens to be one of the larger sources of capital investment and R&D spending). And what ever happened to the notion of equal treatment under the law?
Fred Z:
How would you deal with dividends to foreigners?
That's me. I own a lot of US stock. Standard wisdom has it that I should pay the USA income taxes on the income I earn in the USA. OK. But then,how about that portion of the dividend that comes from the corporation's international operations? How about that portion that comes from the corporation's operations in Canada, where I live?
Sometimes when I look at my Canadian Tax returns and consider my dividend income from American oil companies making much of their profit here, my head spins. Well, anything to do with taxes makes me spin, but the politico induced complexity of this mess makes me long for the old TJIC solution.
Rope!
February 23, 2012, 11:46 amDC:
This is one of the major reasons why I support the Fair Tax. I'd love to hear your thoughts on that.
February 23, 2012, 11:53 amDC
BFD:
Not taking a position on it being a good or bad idea, but a 0% corporate rate misses taxing dividends paid to 1) individuals who don't have to pay US income taxes and 2) non-profit's endowments that don't pay income taxes.
February 23, 2012, 12:03 pmJohnathan:
Once you allow the error into your thinking that *any* taxation is justified, you can justify any arbitrary taxation arrangement, and ultimately, only political calculations determine the what gets implemented.
February 23, 2012, 12:16 pmmorganovich:
this gets a little trickier than that.
so, i'd incorporate "morganovichcorp" which would be a holding company and own my current business as well as a home leasing business, a restaurant, an auto leasing business, a travel photography business, etc.
i'd run all my income and expenses through it and retain the cash that the company.
it would never flow through to me. i'd make a few grand a year.
bingo, no taxes.
hell, i could probably get welfare and medicaid.
i think your idea might create some perverse incentives.
February 23, 2012, 12:39 pmArthur Felter:
While this plan is a helluva lot better than the current one, I think it isn't the best (and while we're wishfully thinking, why not wishfully think of the best?). I think it is flawed because it still penalizes saving and investing, which are true driving forces of the economy. By taxing capital gains and dividends as regular income: sure, you make it "fair" for shmucks like Buffett. But you also put a higher price on saving money and a lower price on consumption.
Thus I am an advocate for a strict consumption based tax: it's fair - you pay only what you consume, and if you're rich and you consume more, you pay more taxes - and it encourages saving and investing.
(Though, in a way, I'm not an advocate for the consumption tax. I'm scared sh!tless that if we scrapped the current tax code in lieu of a consumption tax, it would last for an administration or two before another moron like Obama would reinstate the income tax... and then we'd be left with an onerous consumption tax AND and income tax)
February 23, 2012, 12:49 pmdave smith:
Pretty sure it would be illegal to use corporate retained earnings to buy personal items. What you are suggesting would be like having any home business and claiming every expense you incur as a business expense.
Furthermore, if people could do as you say ANY difference between personal income and corporate taxation would give incentives to people to "incorporate" their everyday lives.
So I don't think you have a valid objection.
February 23, 2012, 12:57 pmdave smith:
I am also pretty sure that foreigners DO pay tax on dividends paid out by US companies. In fact, they have paid higher rates than US citizens in the recent past.
http://www.bankrate.com/brm/itax/tax_adviser/20080707-foreign-dividend-tax-a1.asp
So, missing the tax on foreigners is also not a valid concern for Warren's proposal.
February 23, 2012, 1:01 pmdave smith:
There are perhaps two reasons to have a separate corporate income tax. Neither is ever discussed in the media. First, you might want to tax corporations because they retain profits. So households (who ultimately pay all taxes anyway) get a substantial deferment to their tax liability. You'd want to tax the corporation since they have the cash on hand (the ability to pay) and the shareholder's households do not have the cash. Second, you might want to separately tax corporations since they enjoy a benefit that other business arrangements do not: limited liability.
February 23, 2012, 1:07 pmJBurns:
I've had this thought for some time.
As for foreign payments, we already have a withholding tax structure to deal with payments made to foreign recipients. Just set a fixed withholding rate for foreign recipients (it's a little messier than this due to tax treaties, but the concept already exists).
Morganovich is partly correct. His strategy on a personal level isn't going to work very well. Income doesn't just come in the form of cash. Your Morg. Inc. is paying you in kind -- with housing, a car, etc. You'd still have to declare all that and pay taxes on it. Many a person has found out the hard way that having a business pay your personal expenses is not a way to make friends with the IRS. But this would be an issue with retained earnings. I think it would mean most companies would have to be structured as pass-through entities for tax purposes (maybe everything that is non-public or something).
One thing I wonder is why, if double taxation is such a big issue, more larger businesses aren't strutured as LLCs. If you have profits that you'd have to pay taxes on as a business, those tax obligations would flow through to the members. The business could just pay a distribution equal to the typical tax obligation so people are cash neutral. And any additional distribution is tax free in that structure. [Warren, if you read this I'd be interested in your opinion given your financial / business / consulting background]
Frankly, in the current environment if I were a Republican I'd say to Obama, fine, we'll tax dividends as regular income so long as companies can deduct dividends from their taxable income. I think most people would understand that the gov't shouldn't tax the same income twice -- I suspect most people don't even realize that dividends are taxed twice.
February 23, 2012, 1:18 pmTXJim:
I like any tax proposal containing sentences that lead with "eliminate".
February 23, 2012, 1:35 pmJohnathan:
@TXJim: You need to put the period before the quote. Then I'd like it too.
February 23, 2012, 1:38 pmozzie39:
If, as you propose, capital gains are taxed at ordinary income rates, I believe that all gains so taxed should be adjusted for inflation. Otherwise the effective tax rate, particularly for long term holdings, could be vastly increased.
February 23, 2012, 1:44 pmSlocum:
"And what ever happened to the notion of equal treatment under the law?"
Things were bad already and have gotten distinctly worse (the 'old GM'/'new GM' shenanigans making a travesty of bankruptcy law being just the most prominent example).
February 23, 2012, 1:44 pmCardin Drake:
Taxing capitol gains at the rates of ordinary income is patently unfair unless you index if for inflation. Which we are about to have a lot of! It is a mechanism for the state to take wealth from it's citizens. A low capitol gains tax rate is a substitute for indexing, which would be a nightmare to administer, even though it would be the fairest tax.
February 23, 2012, 1:54 pmTXJim:
@Johnathan: Duly noted..."eliminate." Lol!
http://theothermccain.com/2011/05/17/stuff-spell-check-wont-fix/
February 23, 2012, 2:24 pmJens Fiederer:
http://grammar.ccc.commnet.edu/grammar/marks/quotation.htm
I prefer the British style, which actually makes sense.
On the Internet, nobody can force you to be American - at least not in every way.
(Most other matters, I prefer to be American!)
February 23, 2012, 2:34 pmSlocum:
"Taxing capitol gains at the rates of ordinary income is patently unfair unless you index if for inflation"
Yes -- and so is taxing interest income without indexing for inflation. But I don't see why that indexing would be particularly hard to administer.
February 23, 2012, 3:24 pmme:
What's this "fair" you are talking about? ;)
Simplicity is I think a key factor to rank taxation proposals by (it saves on the diseconomic overhead of armies of consultants creating more paper).
Never taxing corporations would definitely solve that and encourage business. Taxing all income equally also helps with this. The fairness of taxing multiyear investment gains is only an issue for illiquid investments (where, indeed, it is a big issue), but technically, funds management can get around that easily.
February 23, 2012, 4:25 pmTed Rado:
One of the bad effects of business taxes is that it messes up optimum location of a business. Lets say that engineering and cost studies show that the best place to locate a proposed new business or factory is in state A. Locating in state B would cost X dollars per year more. But state B offers a tax break equal to X plus Y. Thus is Y dollars per year cheaper to locate in state B. Now society as a whole (consumer plus taxpayer) is out of pocket to locate in state B rather than state A.
In a more complicated way, I am sure this logic applies to optimum world location as well as state.
In addition, politicians steer defense and other businesses to their home state with all sorts of government interventions.
I don't know how much we pay for all this nonsense, but it must be a bunch. Note that we ultimately pay for everything as consumers or taxpayers. Business taxes are just a pass through to hide taxation from the citizenry. For that reason alone, eliminating business taxes and putting it directly on the individual would be a good thing. All business would then be optimally located.
February 23, 2012, 6:07 pmLTMG:
Yes, absolutely make this change. And make a similar parallel change to the individual income tax.
What's the downside? Unemployed tax attorneys, tax accountants, tax return preparers, and (Oh, the horror!) IRS staff.
Such a change in the tax laws and regulations could push tens of thousands of working people from work that does not contribute to the strength of the country in any way into work that contributes to the GDP and the strength of the nation.
February 23, 2012, 9:28 pmCapn Rusty:
A tremendous benefit from eliminating the corporate income tax is that it would also eliminate about half of K Street.
February 23, 2012, 9:33 pmIGotBupkis, Three Time Winner of the Silver Sow Award:
>>> what ever happened to the notion of equal treatment under the law?
I believe that ended about 1913. It's just been snowballing ever since.
February 23, 2012, 10:07 pmIGotBupkis, Three Time Winner of the Silver Sow Award:
>>> I prefer the British style, which actually makes sense
That's hard to believe. The Brits gave up on the stuff when they ousted Churchill, with a brief spate of it when they put in Thatcher.
February 23, 2012, 10:10 pmSam L.:
Equal treatment under the law? What are you, come kind of Communist?
February 23, 2012, 11:12 pmNL_:
I'm not opposed to this, but it will likely necessitate a great deal of enforcement of the Accumulated Earnings Tax, which is largely moribund right now because of the double tax. If you remove corporate tax, but still tax dividends to shareholders and individuals, then the obvious incentive is to pile your money into a C corp and invest and reinvest the money tax free.
The Accumulated Earnings Tax tries to force companies to disgorge the money they're holding beyond the reasonable needs of the business. This is hard to determine, but the sort of planning opportunity your reform would open up basically forces the IRS to chase down the revenue that will inevitably be funneled to C corps. They'll have to come up with rules and procedures for how to deal with all the money placed into entities as tax shelters.
Basically any tax is going to cause distortions and be more complicated to administer than initially expected.
February 24, 2012, 12:12 amme:
Meh, scrap the accumulated earnings tax as well. What's it's use? Ultimately, the business will pay out some of its capital, at which point it will be taxed.
February 24, 2012, 12:44 amBob Smith:
If by "larger companies" you mean "public companies", there's a reason they aren't LLCs: federal law requires public companies to pay taxes as C corporations. They cannot by law receive passthrough tax treatment, except in certain limited circumstances (the "master limited partnership") that few companies can qualify for.
February 24, 2012, 12:51 amCardin Drake:
I'm for a corporate tax rate of zero. Nothing will help the employment situation more than that. However, a high capital gains tax rate, coupled with hyperinflation, is just a wealth confiscation scheme by the government. With the reckless spending that is going on right now, the value of the dollar will inevitably fall. People should be very wary of higher taxes on capital gains when the gains are not indexed and the "gains" are just an illusion
February 24, 2012, 5:59 amMark2:
I proposed this on another board I write on, no taxes for corps and people pay @ regular income tax rates.
At first it seems like a good idea, because the overall tax rate would be slightly lower, and it would encourage companies to base here. There are two negatives to the plan that were thought up.
1: It would encourage much more foreign purchase of American companies - not necessarily a bad thing, but if US citizens have a much higher personal tax rate than someone in another country which has a balanced tax plan (tax on corps and people) - someone in the other country would prefer to purchase US stock because of the zero tax rate, and the lower tax they pay on personal income.
2: Dividend distribution would be extremely curtailed. If people get taxed at a rate less than the company tax rate, then people owning stock will clamor for dividend distribution. IF the corporate tax is zero, and dividends are taxed at 25 - 39% as they will be next year, there will be a great push by owners to keep dividends in the corporation, so the tax event never occurs. This could have an unintended consequence of lowering tax receipts much more than expected, as companies stop paying taxes, and stop distributing dividends so owners no longer pay taxes either.
So in my opinion it is better to tax the company but not tax the owners. But then we get leftists complaining that somehow rich folks are not paying their fair share.
February 24, 2012, 7:54 amRick from Roswell:
Coyote's tax plan would incentivize profitable corporate owners to retain the cash from profits in the corporation and only pay dividends to the individual owners when absolutely needed. Corporate owners would be motivated to shelter their corporate profits from personal taxation by retaining as much cash as possible in the corporation (just another way for federal tax policy to mis-incentivize economic behavior). I agree that a consumption-based tax (e.g. Fair Tax) in place of an income tax is far preferable.
February 24, 2012, 8:08 ammorganovich:
"Pretty sure it would be illegal to use corporate retained earnings to buy personal items. "
it isn't now.
happens all the time.
besides, it's not personal, it's business. my trip to maui was for my travel photography company, not a vacation. look, i took some pix.
that car? business use.
house? corporate office.
the rest of it? it's a rental. i rent it from my company. $100/month.
this would be so easy to get around it's unreal.
you just cannot leave an arb open like that.
February 24, 2012, 9:47 amcf:
There's at least one good reason to tax corporations - they don't vote.
February 24, 2012, 10:03 amMark2:
Per my comment and several others - if corps pay no taxes but people do, Dividends will not be distributed, and there will be no tax collection on the money.
The code could be written this way though.
No corporate taxes on any funds/dividends that are distributed to the shareholders.
That would keep the incentive to pay dividends.
February 24, 2012, 10:32 amBobby L:
This is exactly why we set up our company as an LLC. As far as the IRS is concerned it is just a pass through entity and does not pay taxes itself; the individual members pay their income tax on their own 1040.
February 24, 2012, 11:01 ammorganovich:
"There’s at least one good reason to tax corporations – they don’t vote."
how is that a good reason?
sounds like a bad reason to me.
February 24, 2012, 12:42 pmMark:
The corporate "income" tax is really structured as an excise tax, in other words, a sales tax. So, instead of allowing this tax to be manipulated by the corporations themselves, lets make it a real sales tax. Set a national sales tax to 8%. Now, corporations that make sales in the United States will pay that tax. They cannot hide it by transferring the profits to offshore corporations. They cannot get the government to give them behind the scenes tax benefits.
When you eliminate the inefficient measures corporations go to avoid paying an onerous 35% tax rates on their incomes; when you eliminate the accounting that is necessary to keep track of these tax measures; and when you keep the profits in the UNited States for investment instead of wandering around the globe I think that this "sales tax" would have minimal impact on price. We already pay for the 35% and all of the inefficiencies attached to it. A more direct sales tax of 8% probably causes the overall price of a product TO DECREASE, while creating incremental revenues for the government.
Further, the added benefit of a sales tax is that it raised revenues from foreigners and also from people whose income is from the black market. Tony Soprano may be able to avoid federal taxes on most of his income, but when he spends his money he cannot avoid the sales tax. Sure, he can find someone that might make an illegal sale to avoid it, but that is a big risk to take for such a small percentage. High rates=High avoidance. Low rates mean it isn't worth it.
February 24, 2012, 1:01 pmDon:
Rick from Roswell (and others): "Coyote’s tax plan would incentivize profitable corporate owners to retain the cash from profits in the corporation and only pay dividends to the individual owners when absolutely needed."
Uh, the REASON why so many corporations today don't give dividends is because they are double taxed. As the tax on dividends rose (both on the recipient's side and on the corporation's side) it made less and less sense to pay them. Pretty much the only corporations paying dividends today were founded prior to the 80's.
This has led to the poorly run corporations we see today, where the focus is on increasing the stock price (short term) because that's the only meaningful way to increase share-holder value.
Warren's proposal would end this double taxation, and people would again vote with their feet, offering money to companies who paid dividends and making it harder for those who horde cash to raise funds from stock offerings. This would, of course, drive those companies stock prices up and to some degree punish those who don't by driving their stock prices down.
It would also help end the short-term thinking that gets so many companies in trouble. What's best for tomorrow's stock price may not be good for the company 1-10 years from now, but it's hard to tell your shareholders this when so darned many of them only look at the stock price on Yahoo! at the end of the day. Once share holders are settled into a long-term ownership of a company, counting on the dividend, they'll start making PROFIT the real measure of a company, and they'll start paying attention to the long-term health of their investments because it will effect their future income.
BTW, this will never happen for one simple reason. What I've just described is ALSO how politicians think and most of them cannot imagine making decisions that will help the country beyond the next election. Those few that DO think in such long terms are treated like outcasts. They don't get to play any reign deer games!
And they call tax reform a "race to the bottom!"
(Look, my punctuation is in the right place! :^)
February 24, 2012, 7:58 pmJay Dee:
There is a reason for our highest in the world corporate income tax. It allows politicians to conceal the true tax rate. Corporations become de facto tax collectors. Millions believe they are paying no taxes when the taxes are concealed in the cost of goods and services. Taxes flow downhill to wage earners and it is effectively a flat tax. If corporate taxes went away, the price of goods and services would plummet but individuals would have to pay somewhere around 40% to make up the difference.
The sacrosanct "progressive" income taxes serve to drive up executive pay. Politicians deride the high executive pay they've created. Think this through. For instance, if you raised Bill Ford's taxes by a million dollars, the board would raise his pay so he takes home the same amount then raise the cost of Ford automobiles, parts and services while laying off autoworkers or raising the cost of their benefits. Yeah, Mr. Ford sure paid those taxes. Didn't he.
February 26, 2012, 6:03 pm