StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Why Not Completely Eliminate The Corporate Income Tax?

01 Mar 2012
Posted by Stan Collender

Corporate tax reform as it's most often discussed these days sounds great in theory: Lower the overall tax rate and offset the budget impact by eliminating various special provisions.

Who isn't in favor of that?
As Greg Ip in the latest issue of The Economist notes, the answer is lots of people.
Not surprisingly but largely overlooked in the reports on the plan announced by the White House several weeks ago, the biggest opponents (other than House and Senate Republicans, that is) to any substantial corporate tax overhall come from the corporate world itself: They are the companies, industries, and sectors that currently benefit from the current system at the expense of the corporations, businesses, industries, and sectors that don't get the same special treatment.
And that's just the beginning.
The best way to understand why, regardless of who is president and which party controls Congress, the politics of corporate tax reform will make it much harder to enact any proposal than would seem likely at first glance is to consider the most extreme proposal possible: Rather than just tinker with the corporate tax code by "reforming" it, why not just do away with the whole thing.
Seems easy to love, right? There would be no annual tax return preparation costs; no corporate tax department and, therefore, lower administrative costs; and, of course, no tax payments.
In other words, the world would be a much better place for those who pay corporate income taxes. The only problem: This would be a disaster for many large and extremely influential parts of the corporate tax world.
First, those companies and industries that already pay little or no federal taxes would see no benefit at all if the corporate income tax were to go away. After all, the system that's currently in place means that they pay nothing now and have an advantage compared to their competitors who do.
In fact, the current corporate tax system is a boon for some companies because they have a negative tax rate and get payments from the government through it.
Second, think of all the accountants and tax lawyers who have devoted much of their lives to helping their employers and clients comply with the tax laws, regulations and rules. What they do for a living would suddenly become unnecessary in much the same way that saddle makers found the demand for their product greatly decreased after automobiles replaced horses as the primary mode of transportation.
Add to that all of the other workers in the tax departments who work along side the CPAs and lawyers and would wake up one morning to find their education, skills, and expertise to be superfluous.
Third, add those who lobby Congress on corporate taxes. I haven't been able to find statistics on this, but my guess from being in Washington for more than three decades is that substantially more than half of all lobbying is related in some way to changing corporate tax provisions. By definition, these are influential people who know how to have an impact on public policy issues.
Fourth, consider that a significant portion of a major federal agency -- the Internal Revenue Service -- is devoted to the corporate tax code.
Fifth, a smaller and no doubt less influential group would be those who teach corporate taxes to undergraduate and graduate students who would find little to no interest in their courses. They would quickly would have to go from teaching law, public administration, and economics to history if, that is, there were any positions available.
Sixth, members of Congress and congressional candidates and political party committees would no longer get campaign contributions from corporate political action committees seeking changes in the corporate income tax code because there would be no corporate income tax to change. (My guess is that this could be the biggest campaign finance reform plan ever considered.)
There are more. For example, consider the companies that provide written materials on corporate taxes to attorneys and CPAs.
All of this points out that what might appear to be an absolute political slam dunk -- not just reforming but actually eliminating a tax -- isn't at all guaranteed to happen. And that's the situation for doing away with it completely. Something like the Obama plan, which would offset a reduction in the top rate by eliminating some special tax breaks, would be even more controversial.
Bottom line: If it happens at all, tax reform is going to be far more controversial and take a great deal longer to enact than anyone is currently assuming. Think multiple years rather than months. Also think that enactment is anything but certain. 

 

 

The only way this could work

The only way this could work politically is if the capital gains tax were equal to earned income tax. Basically as long as corporate profits remained in corporate "hands" it would be untaxed, but as soon as it was passed to any individual in any form it would be fully taxed as personal income. Of course, then just about the only restraint on corporations spending money to benefit their executives would be the oversight of the shareholders, and we know what that's worth.


Negative Tax Rate

How did this happen? If a company loses money, why should I pay for it? Let's start by stopping that.


Taxes

I agree if we eliminated the corporate income tax we should treat dividends and stock sales as regular income. But we should also create new higher level brackets (say $1M, $5M, $10M, and $15M+) with a top tax rate in the high 30's. It makes little sense to lump a dentist making $325k a year in with an investor making $10M a year off capital gains.


How did this happen?

Generations of rent-seeking got the corporate income tax structure messed up. Now, as outlined in the the blog post, the rent-seekers are lined up to oppose losing their goodies.

Which of course demonstrates one of the strongest conservative arguments against expanding the scope of government control over society--someone gains a benefit and will oppose reversing a particular expansion, even if it is generally accepted that the expansion turned out to be bad for society.


Of course you're right, and

Of course you're right, and those who want "smaller government" in the abstract are right. But it's all theory and no practice. The actual politicans who claim to be conservative have been far more responsible for the complexity of the tax code than the Democrats. Now when I say this I don't mean they are more responsible for bigger government overall or for our debt (although you could make that argument)what I mean is that the GOP tends to structure it's giveaways to its favored industries and people as tax deductions, tax credits and other "tax spending" while the Democrats are more likely to actually send checks out of the treasury to support those they want to favor. But it's a distinction without a difference.

What bothers me right now in regards to our political choices is that the nefarious influence of money, corporations, lobbyists etc. is the main problem with our government - the complexities, regulations and general feelings of deep unfairness stem from that. Yet we have one party that wants governemnt to do more, and the other that claims it wants government to do less - but without a shread of evidence that this assertion is true. I know, the answer is we can vote for a third party - "if everyone just decided to do this together" is the response heard 'round the internet - but it's just not possible. The game is rigged, you can vote for Vanilla or French Vanilla, tutti frutti is a fiction.


Once we come to the

Once we come to the realization that Conservatism is nothing more than a myth like religion we can move our country forward.

Besides a few of the guys here you didn't hear one Republican screaming when Bush and Cheney told us deficits don't matter.

You didn't hear one of them ask how are we going to pay for the Iraq War if we don't get the Iraq oil. The Iraqi oil was their actual plan. "Smacks forehead".

Even still they want taxes lower on the rich and we still haven't paid for the Iraq war.

Simple math and the CBO told us tax cuts for the rich wouldn't do anything but raise the debt and deficit.

But hey. When your ideology is based on nothing but myth's and faith just like religion.

We get what we deserve.


Effect on Capital Structures

Without corporate income taxes the tax deduction for interest income would no long give debt an advantage over equity. Corporations would move large public placements to preferred stock rather than bonds, reducing the risk in their capital structures.


Corporate Tax

Other points in support:

1. The corporte tax is passed onto the customer in the price of goods, so essentially it is a sales tax.

2. The corporate tax is detrimental to new companies. They cannot afford the lawyers, accountants, and lobbyists needed to work the angles to get lower rates.

3. Each passing year the corporate tax becomes a lower % of government revenue. The IRS is completely outmanned by the corporations. It is getting to be not worth the effort to collect it.

4. Make up the lost revenue by;

- Assign all the IRS corporate tax personnel to enforcing the personal income tax code. Audit everyone reporting more than $200,000.

- Treat all income the same re taxation. No special deal for investemnt income.

- If needed add a national tax similar to Canada's GST to cover any revenue shortfall. States already collect sales taxes so this could be added on with little increase in cost to the government.


At least you are honest. By

At least you are honest. By not even including the non-corporate taxpayer in the list of those who would object, you recognize that the average taxpayer will have nothing to say about this decision. Just left to pay the bill.


Haven't figured it out yet?

Another person who hasn't figured out that corporations don't pay the corporate income tax anyway.

It's paid by shareholders (via smaller dividends on profits), employees (less generous benefits) and/or customers (higher prices).

Of course there's still a big argument over what portion of the tax each of those groups pays...


So if I have my own business

So if I have my own business or investments and I want to shelter money from taxes, I can set up a corporation and as long as the assets stay in the corporation, I will pay no tax. I'm sure the tax shelter industry will take off with this one.


A solution

would be to require shareholders to "realize" excess retained earnings as a capital gain each year. This would strongly encourage corporations to pay out profits in dividends, because otherwise taxpayers would be taxed on income they wouldn't have in hand.

But then you'd have to allow them to realize as well.


OOops

The last sentence was supposed to read:

But then you'd have to let them realize net losses as well.


sure

sure no more C corps, make them all S, sounds perfect


End Corporate tax

I did not see any bad things listed. Agree they could make Interest and Dividends fully taxable. I could even agree to a SMALL VAT to raise some revenue -- perhaps 5% with no prferences.




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