Kill the corporate income tax

I've written a lot about corporate taxes over the years and why the corporate tax rate should be dramatically lower or, better yet, zero. John Steele Gordon recently made a strong case for eliminating the corporate tax ("Top 10 Reasons to Abolish the Corporate Income Tax," WSJ). It's so good it should be required reading for every member of Congress. James Pethokoukis joined in with "The bipartisan case for ending the corporate income tax."

It looks there's some momentum building, so I offer some charts to help make the case.

As the chart above shows, there has been a dramatic decline in the federal budget deficit over the past 5 years. It's now just under 3% of GDP, and that's a level that is not at all problematic. We can easily afford to to something "crazy" like eliminating the corporate tax.

In the 12 months ended November 2014, corporate income taxes paid to the federal government totaled $327 billion, which was 10.8% of federal revenues for the period. As the chart above shows, corporate taxes haven't yet exceeded their pre-recession peak (they hit $382 billion in the 12 months ended June 2007, and were an all-time record 15% of federal revenues at the time), even though other taxes have, and even though corporate profits before tax have increased 26% from their pre-recession peak. Corporate tax collections have lagged other tax collections significantly—perhaps because, as Gordon suggests, corporations have a number of ways to avoid paying taxes that they perceive to be onerous. Any corporate executive worth his salt knows that corporate profits are unfairly taxed multiple times, and therefore he or she knows that minimizing taxes paid is a high priority, and in shareholders' best interest.

In any event, corporate profits are only a small part of federal revenues, so they wouldn't be greatly missed. But if we were to couple the elimination of the corporate profits tax with the taxation of profits passed through to shareholders (dividends and capital gains) at ordinary income tax rates, then surely the revenue lost to the federal government would be minimal. And if there were any supply-side effects from eliminating corporate taxes (e.g., more investment, more jobs, more spending), then federal revenues could easily surge as the tax base grew. It would also make sense to lower top individual marginal tax rates.

In my estimation, eliminating the corporate income tax would be the single most effective way to boost economic growth and restore prosperity to the middle class. It would also be a perfect way to begin to downsize our bloated government and simplify the tax code. It's a no-brainer, non-partisan solution to our still-anemic recovery.