The Corporate Income Tax And True Costs
The Atlantic featured a series of short “how to fix the world” focused pieces in the July/August issue. Among the ideas, which included such things as rejecting the Department of Homeland Security, revoking the vice presidency and rewriting drinking laws, was a piece by Megan McArdle, the magazine’s business and economics editor.
In “End the Corporate Income Tax,” Ms. McArdle made a compelling, albeit rather brief, case. I’ve excerpted portions below:
The corporate income tax may be the stupidest tax we have. At 35 percent, America’s levy on corporate income is one of the highest in the developed world. In 2007, about 2.5 million companies prepared lengthy returns at great expense, yet the tax generated only about 15 percent of total federal tax revenue. The tax on corporate profits discourages capital formation, targets shareholders regardless of their wealth, and fuels frantic, and costly, business efforts to dodge it.
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By one estimate, what companies spend in complying with the tax equals almost 13 percent of the tax bill they owe—and that’s the smallest drawback. Corporations go to extraordinary lengths to avoid taxes. Entire investment-banking firms and law practices have been built solely for the purpose of creating valuable tax deductions, and they employ highly educated and skilled people who could make a greater contribution to society by … well, doing almost anything else, really.
But the most compelling reason to eliminate the corporate income tax is that it doesn’t target those with the most ability (or obligation) to pay. A company’s owners won’t necessarily be the ones who bear the tax—corporations might decide, for example, to pass on the cost of the tax to employees in the form of smaller bonuses. And even if you could guarantee that the fat-cat managers and the owners bear the brunt of the tax, those “owners” aren’t necessarily rich—they could be retirees invested in pension funds, or small shareholders.
I’m a proponent of wide ranging tax relief. I believe we would all be better off with a leaner, more sensible tax code along the lines of a national sales tax (ie Fair Tax) or a flat tax that would ensure fairness by taxing based on percentage rather than progressive punishment for higher earnings.
What’s most often lost in the discussion over how much taxation is “too much” are the indirect costs of greater taxation and regulation. Every new government tax and regulatory policy in practice means more accountants and more beaurcrats who need to be trained and hired in order to help businesses and small owners comply with the new policies.
How much are we losing, not just in dollar terms, but in our cultural wealth, when more and more are needed to check boxes and file forms? To what degree are we stifling research, development and innovation in companies who would have devoted the 13 or 15 percent of their taxed earnings to hiring more employees to move their product lines forward?
The Tax Foundation is a good resource for gaining a better understanding of the national tax picture. Specifically, check out how China is incentivizing growth by exempting investors from capital gains taxes in order to spur markets. Learn more about capital gains and dividend taxes, the outmoded alternative minimum tax, and compliance costs and tax complexity.
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