In this diary, I will try to convince you of a very unpopular view, namely that we should eliminate corporate income taxes (CIT). Chances are that I won't convert you, but maybe I will have given you some food for thought, and maybe your comments will have given me some in return. Look below the fold for my arguments.
Corporations are not paragons of virtue.
This is not exactly a news flash. Corporations at times do some very unfriendly things, both to people and to the environment. But this calls for appropriate legislation, regulation and enforcement rather than taxation. Taxes don't make up for bad corporate behavior; taxes don't prevent bad corporate behavior. I would be in favor of much stricter legislation on corporate governance. We should have a lot more to say regarding compensation for top executives, for example. But this is another argument for another time.
Corporate profits are a genuinely good thing.
It so often happens that corporate profits are roundly criticized for being too large. We sometimes call profits obscene, but profits represent wealth creation, which is an entirely good thing. If a corporation loses money, it has destroyed a portion of the nation's wealth. If it breaks even, it has served the purpose of satisfying the demand of some end customer, but no more. If it makes a profit, it has not only produced the wealth represented by the consumption of its products, but it has something left over for economic growth. If $1 per share is good, then $2 per share is better. The point here is that profits are not something that society should strive to limit. Profits are good; they represent the creation of wealth. We should always celebrate profits.
This is not to say that profits are always used wisely. If they are simply conveyed to the super rich, then we have fallen on our collective faces. In addition to the rich who have provided the capital, it is the worker and the consumer who have made those profits possible. If the worker and the consumer are allowed to prosper, then they will be in a position to provide the capital in the future. In other words, we need to reduce the gap between the 1% and the rest of us.
Corporations cannot bear the burden of taxation.
Corporations are abstract entities that are incapable of bearing the burden of taxation. A consumer can set aside money to pay taxes by consuming less, hamburger instead of steak for example. Corporations cannot do anything remotely analogous; they can only act as tax collectors. It is only people can bear the burden of taxation. It is plain that there are only three groups of people who can possibly bear the burden of the CIT: the shareholders, the employees, and the end customers. It is not at all clear how the burden is apportioned among these three groups. Economists have tried to solve this riddle, but all they have succeeded in doing is demonstrating that there is nothing remotely close to a consensus on this subject.
As an example, consider a company with a large number of skilled employees in the middle income bracket. If the company is making a healthy profit, the workers have a good negotiating point: they (justly) demand a larger share of the wealth. In this company, the workers are disadvantaged by the CIT, because taxes erode their ability to negotiate a better wage.
As another example, consider a company that produces a necessary commodity, say, coffee. The grocery store will will not stop buying coffee simply because the price goes up by, say, 3%. Market share is a non-issue, because the corporate income tax can readily be passed on to the end consumer. In theory, consumers could react by drinking less coffee, but in practice they don't change their habits over a small price increase. In this scenario, it is probably the consumer who bears the largest part of the burden.
In most cases, the shareholder will also bear a significant portion of the burden; after all, the shareholder is the legal owner of the profits. The bottom line is that we don't know who is really paying the corporate income tax. My suspicion, and I will readily admit to being suspicious about such things, is that the tax will fall preferentially on the low and middle income groups. This is surely true when a large part of the burden falls on the worker or on the end consumer.
Corporate income taxes are expensive.
By that I mean that they are costly to administer, comply with, and plan for. The complexity of the CIT is necessary, because business itself is complex, but it drains away tens of billions of dollars from the economy in compliance costs. Second, the CIT brings in less than 10% of federal revenue, so it's not an indispensable source of revenue. Third, it is an unreliable source of revenue.
What would be the benefits of eliminating the CIT?
1. We could replace the CIT, which is undoubtedly regressive, with a progressive tax, namely the individual income tax. I argue that progressive is always better than regressive.
2. We would save tens of billions of dollars in compliance costs.
3. The USA would become a very attractive place for corporations to locate, or relocate. A corporate headquarters brings with it not only jobs, but predominantly high-paying jobs as well.
4. It would deprive the rich of the "double taxation" argument, which means dividends and capital gains would be treated as ordinary income.
5. It would end one of the hidden taxes on American taxpayers and make the tax system more transparent.
By the way, if a country taxes our corporations operating in their country, we would continue to reciprocate.
Is there a downside to eliminating the CIT?
Yes, of course. The elimination of the CIT would entail a significant campaign to educate the taxpayer. Many taxpayers would never understand the argument that they are paying these taxes indirectly. The simple existence of huge pots of money seems to beckon politicians and public alike to impose a tax on it. We would face a daunting public relations task.
Then there is the cynical argument that the 1% would somehow retain their favorable treatment of dividends and capital gains, and engineer a tax increase to replace the CIT that would fall mostly on the lowest 80%. Yes, no doubt they would try to do that, but they try every year to shift taxes towards the lower economic strata anyway. We have to find a way to stop, and then reverse that 30-year trend.
OK, fellow Kossacks, educate me. Why should we retain CIT?