Monday, September 12, 2011

Why I Would End the Corporate Income Tax

There seems to be a consensus that tax reform is the only plausible way that the Super Committee could pass something that increased the revenue collected by the federal government as a percentage of GDP. The table below demonstrates the essence of tax reform: the trade off between eliminating tax expenditures (deductions, credits, exclusions) and declining marginal rates to raise the same amount of revenue. The table also shows the proposed lowering of the corporate tax rate from the current 35% to 28% under the so-called illustrative plan of the Fiscal Commission (that maintained some tax expenditures; p. 29).



The idea in dropping corporate tax rates is to incentivize business activity. In my book, Balancing the Budget is a Progressive Priority, I mostly adopt the tax reform laid out by the Fiscal Commission and agree that 21% of GDP as the amount of tax revenue at which to seek balance is doable and a worthy target. However, I think we should end the corporate income tax (rate of 0%). This is obviously not the typical "progressive" policy suggestion, and it was not what I thought before I began writing the book. But, I changed my mind while considering the options. Here is my thinking:

  • It is a small part of total Federal Tax receipts.The proportion of the federal tax receipts raised by corporate taxes was 35% in 1945 and has been no more than 10% the past 30 years; it was 7.2% in 2010.
  • It is impossible to efficiently tax corporations. One reason corporate tax receipts are low is corporations have successfully lobbied for loopholes. This means the effective tax rate for most corporations is far below the nominal 35%.
  • Dropping the rate to 28% and ending loopholes would be an effective tax increase for many corporations. Many Corporations will have a powerful incentive to oppose such a reform because it would result in an effective tax increase. The most powerful corporations presumably have the lowest effective rate, making any change other than ending the tax very difficult.
  • This should increase the incentive to produce new jobs in the U.S. One reality is that job creation is slow now even though many corporations have lots of cash. It is true this policy will provide them with more. Some say that uncertainty is the culprit of slow job creation, and this would certainly end tax-based uncertainty. If this did not spur job growth then we would know that and could move on from there with different policy suggestions. Matt Yglesias suggests greatly lowering the corporate tax; his suggestion makes sense, but I think we might as well go all the way and end it.
  • Politically, if progressives would push for this it would end (maybe?) the meme that we hate business.
The current corporate tax system is just not worth it. It seems the best course of action to me is to get rid of it. To make up for the lost revenue of ending the corporate income tax I suggest the following:
  • make capital gains and dividends normal income (assumed in table above)
  • increase the top marginal personal income tax rate (I am unsure of how much it would have to rise)
  • bring back an inheritance tax (I suggest 45% over $3.5 million and index the amount)

7 comments:

  1. Income tax is a direct tax. Individuals and businesses pay direct taxes to the government on a regular basis and it is calculated on all sources of income accrued by the business or individual.

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  2. The rate of income tax - including rates for personal service businesses, personal holding companies, and accumulated income tax.

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  3. Tax rates on income - including rates for personnel services companies, personal holding companies, and taxes accrued.

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  5. The logic of having a lower tax rate on capital gains and dividends is that corporations have already been taxed.

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