Eliminate the Corporate Tax!

We should eliminate the Corporate Income Tax now!

Corporations are treated as entities having the rights and responsibilities of individual purposes.  This is historic and dates back at least to Roman times and was adopted by the colonists in America.  As a result when the 16th amendment gave congress the right to tax income, corporations were taxed the same as individuals.

Corporations have not, do not, and never will bear the burden of taxation. Only people pay taxes and even though corporations are treated as individuals they are not the same as people. Corporations pass on their tax burden in the form of higher prices to consumers, lower wages to workers, and/or lower returns to investors. The idea that taxing a corporation reduces taxes on, say the working poor, is a cruel hoax. A corporate tax only makes what the working poor buy more expensive, costs them jobs, lowers their lifestyle, or delays their retirement.

Corporations spend huge amounts of money to comply with the income tax code.  In 2005 the Tax Foundation calculated that the cost of compliance for corporations was $148 billion.

Corporations spend huge amounts of money to seek advantages from congress.  In 2011 OpenSecrets.org reports $3.3 billion spent on lobbying.  Much of this was spent on seeking tax benefits.  Although a minor cost, relative to compliance costs, these efforts are corruptive, and a major cause of the tax code complexity and increasing compliance costs.  These ‘special’ tax provisions are also instrumental in creating barriers to entry to potential competitors (a primary reason that corporations aren’t screaming to get the corporate tax eliminated!).

Corporations can currently reduce their tax burden by keeping profits earned outside of United States outside of the United States.  They are only taxed if these profits are repatriated and thus they are encouraged to use those profits to build production outside of the United States.  This is encouraging companies to expand off-shore!

Compliance and lobbying costs are non-productive.  They do not create ‘value’ for the consumer.  But they do require intelligence and as such people involved in compliance and lobbying are among our brightest and typically best paid employees.  Just think what might be achieved is these same minds were directed to research and development!

Recent studies show that it is actually labor that ends up bearing most of the burden from the corporate income tax.  With reference to William Gentry’s paper for the Dept. of the Treasury/Office of Tax Analysis (12/2007), he found the following conclusions:
–          Our central estimate is that 61% of any additional [corporate] tax is passed on in lower wages in the short run and around 100% in the long run. (Arulampalam, Devereux, and Maffini, abstract)
–          Using cross-country panel data from the Luxembourg Income Study, I estimate that a 10% point increase in the corporate tax rate decreases annual gross wages by 7%. Using U.S. data on corporate tax revenues and total wages, these estimates predict that labor’s burden is more than four times the magnitude of the corporate tax revenue collected in the U.S. (Felix, p. 3)
–          The results in this paper suggest that corporate tax rates affect wage levels across countries. Higher corporate taxes lead to lower wages. A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates. (Hassett and Mathur, p. 25)

Assuming this is correct, we should expect reductions in corporate taxes to result in increased wages.  But that assumes that the selling price remains constant and an alternative is that product costs would be reduced to make a product more competitive.  Either result is highly desirable, with lower prices we should expect production to expand thus creating more jobs.  I personally believe the later would be the most likely result, at least for those companies competing in the world market.

Now is an opportune time to eliminate the corporate tax.  Recent revenue from the corporate tax has been less than $250 billion per year.  Much less than Obama’s stimulus spending and much more effective.  Recent estimates by Christina Romer, the head of Obama’s Council of Economic Advisers, suggest that tax cuts have a multiplier of three vs. a government spending multiplier of about 1.5In other words, the president’s own economic advisers expect twice the growth in GDP from tax cuts versus stimulus spending!

It is generally recognized that GDP growth is essential to curbing the deficit and reducing the debt.  While the parties argue over spending cuts versus tax increases, both parties seem to acknowledge that the current corporate tax is depressing growth and too complex.

Why isn’t this the ideal time to actually eliminate the corporate income tax?

  • We can expect immediate stimulus to GDP growth.
  • It will immediately encourage the repatriation of off-shore profits, currently estimated at $1.5 to $3.0 trillion.
  • It will immediately discourage lobbying for tax privilege, removing at least some of the corruption from our government.
  • It will allow for the immediate reduction of up to 50% of the IRS, which is the portion currently estimated to be required to administer the corporate income tax.
  • It immediately reduced the need for tax compliance personnel at the corporate level, saving a minimum of $148 billion which will be passed on as reduced product costs, higher labor wages, or higher stockholder returns.  Any and all of these would be a stimulant to the economy.
  • We should expect to see production returned to the U.S. creating jobs and more growth.  We can also expect more foreign investment in our companies.

All of these actions will lead to job growth and result in an increase in personal income tax/payroll tax revenue.

Eliminating the corporate tax is a win-win.  Corporations become more competitive and spend their money on adding value rather than avoiding tax.  At the same time the government will see increased revenue from a growing economy increasing tax revenue and at the same time the cost of administering the tax system is dramatically reduced by as much as $7.5 billion each year.


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2 Comments on “Eliminate the Corporate Tax!

  1. Here is a typical comment about the corporate tax:

    “Corporations employ a slew of strategies to minimize the amount they pay in taxes. Some companies park assets overseas where they can’t be taxed, while others claim sizable deductions based on the stock option packages offered to their employees. Almost 70 percent of companies are structured in such a way that they don’t pay any federal corporate income tax at all, instead passing along the burden to investors.” – from The Huffington Post

    Notice how the statement makes it seem that those ‘evil’ corporations are avoiding taxes by ‘passing along the burden’ to investors?
    In reality corporations always pass along their taxes to: 1-labor, 2-stock holders (investors) or 3-consumers!
    I believe a significant portion is passed on to consumers and results in artificially inflated costs, i.e. inflation.

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