No More Corporate Taxes?
November 24, 2008
Why get rid of corporate taxation? Because these taxes hurt
the poor and middle class. This is easy to understand once you
grasp a few basic principles.
The first of these is that any cost imposed on a business
is passed on to customers. This is true at all levels. If food
and labor costs go up, restaurants raise prices, right? The same
is true of large corporations. If a certain return on investment
is expected, and taxes on corporations reduce that, investors
hesitate to invest. Companies have to raise prices in order to
get back to an after-tax profit level that attracts investment.
The second important principle is that all costs – including
taxes – are ultimately paid by people. Only people create
value, whether through small companies or large corporations,
and ultimately only people can pay the costs of things. But who
pays, and is there a way we can all pay less? The answer to the
last question is yes – but I’ll return to that in a
moment.
As pointed out, corporate taxes are simply added to the costs
of the things produced, which means the poor and middle class
consumers bear the brunt of the burden (since prices affect them
more). Consumers are the ones really paying the taxes in the
end, the same as when rising property taxes for landlords are
passed on to renters, or many other examples we could point to.
Is there a better, more just, and more efficient way?
What if we had no corporate taxes? Higher profits would be
possible with even with lower product prices. But those higher
profits and lower product prices would not just come from the
direct impact of eliminating corporate taxes. Corporations currently
spend millions of dollars to reduce taxes. They hire whole buildings
full of accountants to find loopholes. They structure deals in
ways that might not make sense financially if it were not for
the tax consequences. It’s all very wasteful and ultimately
unproductive.
Without taxes, the whole corporate costs of tax-avoidance
and the resulting inefficiencies would be gone. Also, the whole
tax accounting industry would be smaller, meaning more people
would be in careers that are more directly productive of value
(I’m not suggesting for a second that tax attorneys and
tax accountants are not productive and needed, but the value
they offer is by nature derived from more fundamental value creation,
of which there would be more if fewer of them were needed). That
would mean a more productive society.
Okay, so you can see that lower prices for goods, more efficient
companies and a better economy might result. But what about the
lost tax revenue? How would we make that up without raising taxes
on all of us? Two basic ways come to mind.
First, the increase in economic activity would mean more income
at all levels and therefore more tax revenue, even if existing
rates are the same. If corporations hire more, those employees
all pay taxes. If you get a raise or make more with your small
business, that 15% tax rate on $50,000 means more money collected
by the government than 15% on $40,000, right?
The second way we replace the “lost” tax revenue
is by not losing it. We would simply have to tax owners of corporations
on their share of profits each year, whether or not the corporation
retained some of those earnings for future use. Of course, retained
profits would be added to the investor’s or owner’s
cost basis for figuring capital gains when he or she eventually
sells. Some might argue that this latter problem (taxes on retained
earnings) would scare off investment, but the increased profitability
of the corporations would balance this out I think.
Keep in mind too that there would no longer be a reason to
exaggerate expenses or otherwise “hide” profits at
the corporate level, since no tax savings accrue to the company
by hiding profits. So we could rightly expect that there would
be an increase in reported profits because these practices would
largely end (at least in publicly traded corporations where the
owners/shareholders didn’t directly make such decisions).
In other words, this could bring out into the open many profits
that owners would then be taxed on as personal income.
Let’s look at that a bit closer, because it is so important.
According to a study released by the Government Accountability
Office in August, 2008, two thirds of corporations in this country
paid no federal income taxes from 1998 through 2005. Many commentators
were quick to point out that this didn’t mean they were
illegally avoiding taxes. Of course the fact that they may have
been legally avoiding taxes just makes my above argument that
much stronger.
Some suggested that many corporations were small and had no
profits to pay taxes on. That’s true, but could that account
for so many paying nothing for years? Not likely. The same study
found that 68% of foreign corporations doing business here did
not pay taxes during those seven years. It seems unlikely that
most foreign corporations doing business here are small family
businesses, and it seems very unlikely that most corporations
would be around after seven truly profitless years.
The more likely scenario is that they are hiding profits in
legal ways to avoid taxes. That would mostly end when there is
no longer a reason for it. It is difficult to say how much profit
would suddenly appear if there was no corporate benefit for hiding
it, but it would all become taxable once it was treated as personal
income of shareholders.
As it is now, individuals who own shares in a corporation
do not pay taxes on profits (which are taxed at the corporate
level), and they pay a special reduced rate of 15% on dividends
and capital gains. This is why the wealthy often pay a lower
effective tax rate than the middle class (and even the poor if
you count Social Security, Medicare and sale’s taxes). Warren
Buffet famously pointed out that he pays just 17% on his millions
in income while his secretary pays 30% on her $60,000 income.
I’m suggesting that it is more fair to all pay the same
on any income, including all profits accrued by owners of corporations.
This effectively makes for a more productive economy. It also
corrects what has been the unfair treatment of the poor and middle
class to the benefit of the wealthy. After all, special tax treatments
for various forms of income generally do not benefit those who
do not have large assets or investments. They lower contributions
to government (taxes) for the wealthy, and we can guess where
the slack has to be picked up.
Get rid of corporate income taxes. Only the productivity of
real people can pay for government or anything else for that
matter. Let’s not hide the facts about who pays behind elaborate
and unnecessary tax systems.
(Note: There may be good reasons for some taxation
at the corporate level, like to have taxes paid by foreign corporations
which do business here and would otherwise receive all the necessary
government services (roads, ports, legal system and so on) without
paying for them.)
Note: This is part of a series. You can find all of
the pages listed and linked to here:
The Redistribution
of Wealth to the Wealthy
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