Senate Finance Committee Chairman Max Baucus released a draft proposal yesterday for reforming the U.S. corporate tax code. In it, he proposed lowering the current corporate rate from 35% to less than 30% (he didn’t specify an exact rate).
In a perfect world, we would eliminate the corporate income tax altogether. Here’s why:
1. Corporate taxes don’t collect much revenue. Here’s a look at how much revenue we get as share of GDP over time:
We collect around 2 per cent of GDP in revenues from the corporate income tax each year. That’s not nothing ($320 billion), but it’s not much given that after-tax corporate profits were almost $US2 trillion in 2012. Here’s what what you’re thinking: Eliminating more than $US300 billion in revenue would leave a gaping hole in the budget. That’s why reforming the entire tax code is so important. In addition to eliminating the corporate income tax, we would…
2. …tax capital gains and dividends at the normal tax rates. One of the reasons that there is a special exemption in the first place is due to double taxation. Corporate profits are taxed once and then the dividends and capital gains to shareholders are taxed yet another time. Whenever anyone proposes eliminating this exemption, executives start yelling about double taxation. And they’re right! However, if we eliminate the corporate tax, which we’ve already shown collects considerably less revenue than its 35% rate implies, we can tax capital gains and dividends as normal income. This won’t make up all of the lost revenue, but there are other ways to get there. We can raise the payroll tax cap, implement a carbon tax or a number of other different things.
3. One of the best reasons for doing this is that the corporate tax is not necessarily progressive. Research is mixed on who actually pays the corporate income tax – shareholders or employees. After all, the tax ultimately comes from someone’s wallet. Most economists agree that at least some of it is passed on to workers. Some believe that workers actually pay the majority of it. If we replaced the corporate tax with taxes targeted at the wealthiest individuals, we could actually make the tax system more progressive.
4. Corporations also waste huge amounts of resources funelling money into tax lawyers and lobbyists to find ways to reduce their tax bill. Eliminating the corporate income tax would allow these companies to invest those resources back into the company where they can be put to better use.
5. The current system disadvantages new firms. Right now, U.S. corporates pay the highest tax rate in the world at 39.6% once state taxes are factored, but U.S. companies have gotten particularly good at paying a much lower rate. However, new companies are not nearly as well versed is corporate tax law. In order to compete with current firms, those companies must invest not just in their development, but also in lawyers to reduce their tax bill as well. Without them, they may not be able to compete. The combination of a high corporate rate and a huge number of loopholes is an impediment to new firms.
6. It can also make our financial system safer. This comes from Megan McArdle. Since debt payments are deductible, this incentivized firms to finance investments using debt over equity. Doing so inherently makes them risky. Getting rid of the corporate income tax would remove this incentive.
We can make our tax system more progressive, our economy more competitive and more efficient, and our financial system safer by eliminating the corporate income tax and replacing the lost revenue with taxes aimed at high earners. It also should have political appeal on both the left and right since the left will support the increased progressivity and the right the elimination of the tax altogether.
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