My Corporate Tax Plan
Some folks on the Left are starting to question the corporate income tax, recognizing what economists have known for years, that a lot of the tax is paid by consumers, making it more regressive than just (say) punishing Exxon for being large and productive.
There are many other reasons to hate the corporate income tax
- It does not raise very much money
- Its administrative costs (think corporate tax attorneys) is very high
- It is hugely distortive. The tax preference for debt over equity helped drive the LBO boom, for example
- It is the font of much corporate welfare and cronyism. A LOT of political paybacks get made within the corporate tax system
So here is my simply two-point plan
- Eliminate the corporate income tax. Entirely
- Tax dividends and capital gains as regular income on individual tax returns
Done. All corporate profits get taxed but only when they pass through to individuals as capital gains or dividends. I think this would actually raise more money but rates could be adjusted (or better yet deductions eliminated) if needs to keep it neutral.
I believe the economic benefits of this would be immediate and substantial.
Of course, corporate tax attorneys are rich and powerful and would cut their throats to stop this. It would be enormously entertaining to see them try, and in turn see what the reaction of their clients was to this.
Broccoli:
I have advocated this for years. It has a lot of beneficial side effects. For example, there would be no reason for 501c3 corporations and other special tax classes and all the paperwork that goes with it. A non-profit would be just like any other corporation, they just wouldn't pay out dividends.
October 30, 2013, 8:50 ammesaeconoguy:
This will never fly, because as you hint at, corporate lawyers and lobbyists work thru the tax code, and this would destroy their rent-seeking and regulatory capture behavior.
October 30, 2013, 9:11 amMichaelMoran:
When thinking about the corporate income tax, it is important to remember that a "corporation" is just the wrapper, the business inside the corporation produces the income. Currently with high corporate tax rates, people if the can prefer a partnership, or S corporation or REIT wrapper. If you eliminated the corporate income tax, it would then be the preferred wrapper, and most businesses would move to that wrapper (including private businesses that are now in the partnership wrapper). Corporation would in effect become like IRAs, offering deferral to anyone who did not wish to currently pay tax. The revenue losses would be massive.
October 30, 2013, 9:14 ammlhouse:
Here is my alternative plan:
1. "Gross Income Tax" 15.4% tax on all adjusted gross income adding back in some deductions like 401(k) [which is already taxed for FICA]..
2. "Net Income Tax" 10% tax with a single, $250,000 exemption.
3. National Sales Tax The corporate income tax is actually structured as an excise tax so lets make that explicit. A 4-8% national sales taxes would probably offset some or most of its cost by efficiencies Coyote notes, replaces the opportunity for corporate welfare, and captures the taxes BEFORE they corporations ship profits overseas
4. A mandatory 4% payment into a private pension account, 50% of which must be invested in government bond funds. The principal and earnngs from this investment would be protected from taxes in the future
This tax structure has many advantages. On a static basis, it raises more revenues. But, because marginal rates are reduced by almost 50% it would have a very dynamic supply side impact as well. The average taxpayer would see a significant savings, particuarly since their income taxes they currently paid will now be a simple sales tax. No longer will you need to file income taxes (unless you make over $250,000), there no longer are "mortgage interest deductions" requiring accounting and paperwork. Clean, simplle, dynamic.
October 30, 2013, 9:39 amEd:
A person making less that about 13,000 a year is below the poverty line we should no income tax on the first $15,000 earned income and the first $5,000 of interest and dividend income.
October 30, 2013, 10:06 amDavid Zetland:
Ditto. For exactly your reasons (lobbying distortions). Also not that the end of corp taxes would facilitate the separation of heath insurance from work...
October 30, 2013, 10:22 amjohnson85:
You'd basically have to treat the corporation as a pass through entity like partnerships and some LLCs. I suspect the practical effect would be that at a minimum, corporations would distribute enough of its annual net income to its shareholders to cover the maximum potential tax liability. So if the corporation earned a $1 per share, and the maximum marginal tax rate on income is 50%, corporations would more or less have to distribute 50% of its earnings or else they would potentially be forcing people to sell their shares in order to cover the associated tax liability.
October 30, 2013, 11:50 amRuss R.:
Poverty isn't about low income, it's about a lack of wealth.
I can have millions in investments, and have negative annual income (thanks to capital losses). Does that make me poor relative to your "poverty line"?
Think about it. Then think about it some more. Then re-evaluate everything you think you know about income tax and how it should be structured.
Then get back to us.
October 30, 2013, 12:24 pmJoe:
This shows way too much common sense to be implemented but I like it. You need to have some regs prohibiting inordinate amounts of undistributed income/equity but some of those regs exist today and would be easy to modify.
October 30, 2013, 12:42 pmMichaelMoran:
Johnson, good idea, though not really possible. Think of public corporation where shares may be owned less than a day (or less than a minute). Approach which makes some sense is tax business entity, then do not tax dividends from entity or gains. Or make all corporations like REITs where dividends are deductible. And really gets more complex as we are talking about US taxable shareholders/owners, but non US persons and tax exempt entities are big investors, so have to consider them also.
October 30, 2013, 12:48 pmmarque2:
I guess the only problem is that companies would never distribute a dividend again. I guess the retained earnings become part of value and the gain is realized and taxed when the stock is sold.
October 30, 2013, 2:17 pmBut a lot of folks prefer their quarterly dividends.
Ed:
I am not going to bother to rewrite the parts that didn't get posted the first time. Short version: to use as a bargaining position in the fight to get rid of the corporate income tax , offer no income taxes on the first 15k, of 15k 5mil 13-15% 5mil + 18%. Div and int no tax on first 5K after that same rates as tax on wages the idea is to try to short circuit the this a "tax cut for the rich argument."
October 30, 2013, 3:43 pmMingoV:
Numerous countries have eliminated corporate income (profits) taxes. All of them increased tax revenues and exports. This correlation has been known for decades. But, the US keeps the corporate income tax because it is a substitute for a consumption tax that the public will never support. If corporate income taxes are discontinued, and a consumption tax is not enacted, then the only choice for a bloated government that won't downsize is raising income tax rates.
October 30, 2013, 3:52 pmmarque2:
I am not sure. There are plenty of studies to indicate we are overtaxed at the moment. If taxes are reduced we should see more revenue come in. I think short term there would be less to the government because corps would stop issuing dividends, and folks could hold onto shares as a tax shelter - only paying when they sell. But eventually folks would start selling again, esp as they sell stock to replace the dividend.
October 30, 2013, 8:08 pmjdgalt:
I like these ideas except for one thing. The capital gains tax counts all nominal increases in price as gain even if all or most of the increase is inflation rather than real gain.
Solution: Modify Schedule D so that for all long-term assets, the taxpayer's basis in the property is multiplied by an inflation factor (= the ratio of the CPI now to what it was when he bought the property) before calculating gain/loss.
While we're at it, the tax code ought to recognize that every homeowner's residence is both personal-use property and an investment. Thus all gains on sale of a home should be fully taxable, and all losses deductible.
And let's scupper the $3,000 ceiling on deducting capital losses, too.
With those changes, your proposal would be completely fair. Without them, it would only make the economy worse.
October 30, 2013, 9:44 pmjdgalt:
The history of Latin America throughout the 20th century demonstrates another option: once the government has so overtaxed the economy (way above the hump in the Laffer curve) and so overregulated it, too, that tax collections fall and keep falling no matter how high they raise the rates and penalties, that government simply starts financing itself by the printing press, causing runaway inflation. Once this starts, the only hope of ending it is for another Pinochet (or worse) to seize power.
This is what Obama and his Alinskyite friends are trying to do to us. How can anyone still not see it?
October 30, 2013, 9:53 pmjdgalt:
That prediction has already been shown to be exactly backward. Up to 1986 (when the Reagan tax bill caused capital gains to be taxed at the regular rate for a few years), Microsoft was known for its policy of never paying a dividend; instead, it regularly bought back its own shares, thus giving shareholders capital gains and not dividends. Once the 1986 bill passed, that policy no longer made sense and it ended. (I have no idea why it wasn't resumed when capital gains rates were restored, though.)
October 30, 2013, 9:57 pmMNHawk:
The value a Democrat Politician sees in an issue they can use to bull**** a large segment of society can't be underestimated. That's why the corporate tax will never go away. Manipulation. Democrat manipulation of a low information population.
And yes, Republicans who hope to profit off the very system, themselves, post elective office. Think Tim Pawlenty and his million dollar per year lobbying job, he just snared.
October 31, 2013, 8:32 amNL7:
That turns corporations into tax-advantaged entities. We'd likely see reactivation of the Sec. 531 Accumulated Earnings Tax, which taxes at 20% any amount that corporations retain excess earnings (beyond 'business needs') rather than distributing them. This section has been effectively dormant for decades, ever since corporations went from tax-advantaged to tax-disadvantaged. But this would essentially make each C corporation its own tax haven, until it chose to pay dividends. So the IRS, in a furor to see more taxable dividends, would have to come up with ways to monitor the behavior of C corps and make sure they didn't have any "excess" earnings. This is obviously both invasive and subjective, and means that legitimate business plans might have to be altered. The IRS would have a strong influence over when and how dividends were paid, and how much capital was allowed to accumulate tax free within a C corp.
It would also punish any partnership or pass-through entity (like LLC) and S corps, since their owners would be subject to immediate taxation. C corp shareholders could defer their gains until they chose a dividend, while partners would have to take income each year. So we might see proposals in Congress that reverse the "check the box" rules and try to force C corporations (non-public ones with comparatively few owners) to somehow convert to pass-through; then shareholders would have to take personal income each year. The S corp rules as they stand today are intended to mildly obstruct pass-through status, so they would not be suited to this task (anybody looking to grab entity status could take a minute value and give it to a single foreign shareholder or to 101 shareholders, and bust pass-through), so there would probably be several years of discussion and argument over how to write those rules. The big public corporations would almost certainly not be forced to go pass-through, which is not equitable and probably would not be a politically or legally stable equilibrium (only the richest, biggest companies are tax free? try selling that every second November).
Personally, I think abolishing the corporate income tax is a great idea. But Congress will hate the idea and invariably find a way to mitigate the effects rather than allowing people to defer taxation by parking it in corporations. We might also see states try to get in on the action by levying greater corporate taxes to pick up the money the feds leave on the table, and maybe extra taxes on passive investment corporations (e.g. PHCs, in federal lingo).
I'm a corporate tax attorney, and I have to say that most corporate tax attorneys seem pretty pro-taxpayer and not particularly enamored of the corporate tax system. Tax attorneys create the corporate planning that totally frustrate tax-writers in Congress and tax pundits (like check the box, or transfer pricing, or foreign deferral) and get many a politician up on soapboxes. That being said, tax lawyers are really good at finding the weaknesses in almost any tax system you could propose, which probably weakens tax replacement proposals. They also have spent decades getting rulings and letters from the IRS to shape the tax code to suit client needs (primarily by making tax hurdles more obvious and therefore subject to planning), which I guess makes the system a little softer and therefore a little less unpopular. But while complicated and ill-defined tax law makes more work for tax lawyers, almost the entire public work of corporate tax attorneys and the ABA Taxation Section is focused on making the application of the tax code simpler and clearer. Corporate tax lawyers like the simple rules (e.g. "40% of shareholders," "100 or fewer shareholders," "five years or more") even though vague rules (e.g. "substantially all," "business purpose") should create more work. The IRS usually tries to stay vague, while corporate tax lawyers try to pin them down and get specificity.
Congress won't do much to the corporate tax system, except for a rate cut probably in the next few years, because they need it to be plausibly revenue neutral. Cutting the entire thing could not be revenue neutral without massive spending cuts (in a climate where -1% is catastrophic) or massive tax hikes on either personal income or consumption. Corporate tax attorneys probably mostly want to retain the corporate system, while they criticize it, if only because it provides greater legal certainty for planning.
My job as I see it is to make client transactions and investments as effective as possible, which generally means deferring or avoiding tax. Although this means I get work because of taxes (especially high taxes), I don't see any contradiction. My work prevents the government from collecting money, generally speaking, and I think that's great. A doctor benefits from sicknesses, but still has a commitment to your health; a cop is employed due to criminals, but still has a commitment to public safety; a makeup seller is benefited by self-image issues, but still wants to help people feel attractive. So a tax attorney has a job because of taxes, but still tries to minimize tax burdens. I don't find it inconsistent at all. My Republican colleagues like the idea of helping corporations pay less tax; it's my Democratic colleagues (especially former classmates) who feel some inner turmoil about this work.
October 31, 2013, 11:18 amTodd Owens:
Unlike people, Corporations are state-defined entities. The only thing I know is we should not have any federal personal income tax. Corporations should pay taxes because they are not people. Prices will go to market levels as non-corporate producers undercut corporate pricing schemes.
October 31, 2013, 5:31 pmNL7:
Corporations collect tax, but people bear the burdens. It comes in the form of reduced compensation and benefits, reduced dividends and reduced investments. It's a tradeoff that has to come from somewhere, otherwise you could raise corporate taxes to a million percent and nobody would feel any pain. As it happens, the corporate tax does hurt people, and to a large extent those people are the employees.
October 31, 2013, 8:41 pm