Saturday, January 3, 2015

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.

10 comments: said...

Personal income tax is up more than corporate. Try dialing it back, too! Happy New Year.

Benjamin Cole said...

The corporate income tax, and FICA taxes, appear designed to penalize produtive behavior (working, hiring, investing).

Taxing pollution, gasoline, and Pigou taxes make more sense.

Total elimination of corporate income taxes, matched by equal cuts in "national security" outlays, strikes me as a good idea.

steve said...

compelling case. ain't gonna happen.

Unknown said...

Corporations do not pay taxes. Customers pay the corporate tax.

jpmist said...

In the face of historically high corporate revenue and profit, why do corporations insist on forcing individuals to pay their share of taxes?

And don't argue "jobs." Job creation is a secondary effect of shareholder wealth creation, not a corporation's primary purpose.

Unknown said...

The problem with eliminating the corporate income tax is that the owners could avoid income taxes by keeping profits at the corporate level. This strategy is less of a problem with large publicly held corporations, since dividend and buy back policies are more often driven by other concerns, but in privately held corporations allowing the retention of profits without any income taxes is a real problem. Even in large publicly held corporations, if there is a dominate shareholder, he or she would have an incentive to limit corporate payouts. Also, a large number of business that are now organized as LLC or LLP would incorporate in order to “park” profits at the corporate level. If you are going to eliminate the corporate income tax, you are going to have some mechanism for forcing distributions to shareholders or some other way of avoiding the “parking” problem.

Scott Grannis said...

The "parking" you describe sounds a lot like "savings." Are you saying that corporate savings would increase, and that this would be a bad thing?

In any event, I think there should be a reduction in personal income tax rates to a level that would not discourage owners from taking distributions from their closely held corporations.

If indeed a "parking" problem developed, that would be evidence that personal income tax rates were too high.

Frozen in the North said...

Maybe snarky

But if Corporation are people they too should pay taxes!

ECG said...

The United States had no personal income tax whatsoever until 1913. If anything we need to get rid of the individual income tax and raise corporate taxes. You have it switched, especially if the goal is to help the middle-class.

Unknown said...

This is such a controversial topic.. Commenting on this kind of topic would not be a good option. I think we should wait and watch how things will turn out to be.
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