Network News

X My Profile
View More Activity

Should we get rid of the corporate income tax?

By Dylan Matthews

The Obama administration is gearing up to overhaul the corporate income tax by lowering rates but cracking down on loopholes that allow offshore sheltering of profits. Megan McArdle argues that liberals should want to scrap the tax altogether, and tax the people corporate profits go to, rather than the corporations themselves:

The "employer half" of the payroll tax, for example, is thought by most economists to fall pretty much entirely on the worker; corporations compensate for the extra cost by lowering the wages they offer. Taxes on corporate profits are exactly the same for middle-class families who have some shares in a 401(k), and multimillionaire heiresses.

Without the corporate income tax, a lot of the incentive for lobbying would go away. Not all of it, by any means -- I am not trying to paint some halcyon future here. But an enormous amount of effort goes into lobbying for tax laws, and politicians often reward favored constituent businesses with little sweetheart fillips to the tax code.

A few months back, Uwe Reinhardt looked at the evidence about tax incidence for corporate taxes, and is less convinced:

Other economists, including the authors of the surveys cited above (Jane Gravelle, Jennifer Gravelle and Thomas Hungerford), are persuaded by the available empirical evidence on the five factors I note that the burden of the corporate tax ultimately rests mainly on the owners of capital. That also appears to be the operative assumption of the Congressional Budget Office, the Treasury and other agencies when they analyze the distributional impact of various forms of taxation.

If the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.

McArdle counters that there are already sufficient incentives for the rich to use corporations to shelter money, but that the IRS has sufficient resources to ensure that does not happen. Given that, I would happily support a deal in which the corporate income tax was abolished in exchanged for an increased IRS enforcement budget and a much bigger personal income tax, complete with cuts in deductions favoring the rich (mortgage interest, charitable donation, etc.) and more steeply progressive rates.

Somehow, though, I doubt conservatives backing corporate income tax abolition would be willing to make that deal. Personal income tax hikes are easy to demagogue. You're raising taxes for actual people, not accounting fictions, and I'm sure many Republicans in Congress would rather defend low taxes for rich people than low taxes for rich corporations.

Of course, defending corporate tax cuts, as the Obama administration looks prepared to do, isn't easy either. But it's hard to see Republicans fighting a pure tax cut plan harder than a mix of cuts and hikes, and so Obama's plan probably has better prospects than an abolition deal.

Also, I think McArdle underestimates the degree to which sweetheart deals in the corporate tax code can be translated to sweetheart deals in the personal income tax code. Suppose there's a deduction in the corporate tax code for linen companies. You could insert a deduction or credit in the personal income tax code for income coming from textile industries. If anything, that replacement would have a less progressive incidence, as the deduction would only be claimed by people who itemized their deductions, whereas the savings on the corporate income tax would go to low-income workers too.

-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.

By Dylan Matthews  | October 28, 2010; 4:15 PM ET
Categories:  Barack Obama  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: The end of the old bulls
Next: Wonkbook: Bernanke backs fiscal stimulus; corporate profits at record highs; Volcker rule battle

Comments

I still say they should offer corporations the chance to pay a carbon tax which will not exceed the normal tax rate. If corporations would rather pay the higher corporate tax and not green up their business, then we make sure that the loopholes are closed and they actually have to pay it.

Posted by: MosBen | October 28, 2010 4:41 PM | Report abuse

McArdle wh ores for the super-rich. Something new and different!

Posted by: AZProgressive | October 28, 2010 4:49 PM | Report abuse

The "employer half" of the payroll tax, for example, is thought by most economists to fall pretty much entirely on the worker;


except for the self employed sole proprietor (of which there are a lot of us) who get screwed on both ends. But hey ya let's increase it!!

Posted by: visionbrkr | October 28, 2010 4:50 PM | Report abuse

Politically, if Obama ended or lowered corporate income tax, his base would crucify him.

.

Posted by: katorga | October 28, 2010 5:05 PM | Report abuse

Realistically, the "rich" don't pay taxes, and they have the money to lobby to ensure that they never do. For example, several years back the Democrats wanted to change private equity salaries from capital gains to normal income. They were flooded with "contributions" and dropped it. Some of the richest men in the US pay 15% on their salary. Gate, Buffet, etc. shield all of their wealth in foundations, as unrealized capital gains, or as normal capital gains. I think Buffet says he pays around 2.5%.

The burden of higher taxes always falls on the middle class and the poor in payroll taxes, fees, excise taxes, sales taxes, etc.

Posted by: katorga | October 28, 2010 5:16 PM | Report abuse

Having a distinction between capital gains income and wage income is a bit of a distortion. I say, abolish corporate taxes, abolish the concept of 'capital gains' to make all income the same, and lower the overall rate to simplify the tax code. This should be balanced to increase the overall tax burden marginally.

Yes, as a big-D Democrat, using the words 'tax burden' leaves a bad taste in the mouth, but putting in quotes seemed too cheeky.

Posted by: gobaers | October 28, 2010 5:41 PM | Report abuse

Not all corporations should be treated the same. Smaller businesses - say worth less than $500 million - should not be taxed at all. We need them for innovation and employment.

Bigger corporations should be taxed and the biggest should be taxed the most. This will help a little in reducing the tremendous power Big Business has in our political life.

Posted by: paul89 | October 28, 2010 6:06 PM | Report abuse

Eliminating the corporate income tax has other consequences. In particular, the rules governing the health insurance provided by employers (e.g., rules on pre-existing conditions) are IRS rules; only those plans that meet certain requirements are deductible. If there is no corporate tax, those rules become meaningless, and important safeguards for the employee's health insurance coverage are lost.

Posted by: jb_in_columbia | October 28, 2010 6:09 PM | Report abuse

Cutting the corporate income tax makes sense largely because there is considerable reporting and enforcement expense without corresponding tax revenue. Consider the total corporate income tax paid by (for example) General Electric since its inception, comparing it to federal expenditures related to examination of GE's return.

At present corporate income taxes unduly burden middle-class entrepreneurs who, largely for limitation of liability, organize their businesses as corporations. For example, a small-to-moderate-size restaurant -- 200-ish seats, perhaps $5M to $7M annual sales -- pays significantly more in federal corporate income taxes than does a mega-corporation which can more easily avail itself of Double Irish and other offshore schemes.

Payroll taxes -- distinct from corporate income taxes -- are also an issue and do indeed tend to lower employee wages; however, eliminating the payroll tax would not increase the wages of the lowest-paid workers BUT might enable employers to pay the burdensome cost of the PPACA. Without substantial relief from the federal payroll tax -- and relief which comes soon -- most small-to-medium corporate employers will fail due to the PPACA: alternatively, the PPACA must be repealed or modified.

Most of these discussions don't benefit from academic analysis: ask a few businesses instead of asking a researcher who has no business experience! Six months ago -- just after passage of the PPACA -- Congressman Waxman refused to allow businesses to present records documenting the problems created by the PPACA: he had questioned assertions made by businesses, had invited them to put up or shut up, but then quickly retreated as the actual records materialized. Rhetorically, one might ask why the social-democrats in Congress would not want sworn fact to be presented by the businesses affected by Congressional legislation... could it be that Congress relied on non-fact and deliberately misled the public?

The truth about taxes is that (a) they are ALWAYS paid by individuals, (b) nobody wants to pay them, and (c) Congress must disguise facts so that paying individuals believe that somebody else is paying all of the tax. Ultimately, a capitation tax (a tax in which each individual pays the same fixed amount) is the only form of taxation compatible with democracy.

Posted by: rmgregory | October 28, 2010 6:29 PM | Report abuse

It's very important to consider the psychology of taxes.

Republicans love to say that higher after tax pay per hour motivates people to work harder, but 100 years ago, after tax pay per hour was a fraction of what it is today, and people worked MORE hours.

There's the long established in economics income and substitution effects (please google this), positional/context/prestige externalities, and other effects, including behavioral ones.

One big issue is the visibility and visceralness of a tax. Is the take home pay per hour all that matters? Will people behave exactly the same way if they take home $100/hour but it was $143/hour taxed at 30%, as they would if it was $1,000/hour taxed at 90%?

There could be a big difference in behavior, thus the advantage of more hidden taxes like the corporate tax and the VAT, so that you earn the same take home pay, but you don't dwell as much on the taxes you are giving up -- because people certainly don't dwell on all that they get from government in return that the pure free market will grossly underprovide or inefficiently provide due to long established in economics market problems (externalites, etc.).

Posted by: RichardHSerlin | October 28, 2010 6:34 PM | Report abuse

Corporate income tax revenue is only $138 billion. Not even 1% of GDP.

We should get rid of it due to the deadweight loss.

I would love to see the elimination of both the corporate income tax and the mortgage tax deduction.

Posted by: krazen1211 | October 28, 2010 7:41 PM | Report abuse

"Corporate income tax revenue is only $138 billion. Not even 1% of GDP."

Krazen1211,

I'm not sure where you get that figure, I see $225 billion during FY2009. During a normal year, collections are closer to 3% of GDP.

http://www.irs.gov/taxstats/article/0,,id=102886,00.html

See this table - includes corporate taxes at lower level of government, but I imagine the vast majority is federal.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=53&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2000&LastYear=2010&3Place=N&Update=Update&JavaBox=no#Mid

"We should get rid of it due to the deadweight loss."

Agreed.

Posted by: justin84 | October 28, 2010 8:52 PM | Report abuse

The corporate income tax is entirely voluntary. Companies that wish to incorporate and get the benefits of limited liability for investors pay the corporate income tax as a fee for this huge gift (of limited liability) from the government. If corporations felt corporate taxes on their profits were too high, they could always covert the corporation to a privately-held company and avoid paying them.

The fact that there are many corporations signifies to me that they feel the benefits of limited liability outweigh the fee of incorporation they pay in the form of the corporate income tax.

Posted by: enormousturnip | October 28, 2010 9:00 PM | Report abuse

Since it is now open season for promoting our favorite tax reforms, I'll pitch mine:

I don't understand why income capital (investment income) is taxed at a lower rate than income from actual work. I believe that this provides an disincentive for children of the wealthy to work for their money. Why should I have to pay 28% or more of my income in taxes just because I had to get up at 6am and go to work and earn it. When a trust fund brat can sit on her rear and not may anything on dividends or 15% on capital gains?

I propose that tax law be changes such that you only get the lower dividend or capital gains rate up to your earned income. Any capital gains or dividends above your earned income get taxed at the current earned income tax rate.

This provides a tax shelter for income earners and provide incentives for the lazy rich to work for their money.

Posted by: BottyGuy | October 28, 2010 9:03 PM | Report abuse

The discussion of whether we should or should not have a corporate income tax misses the fundamental issue that we need to have a balanced government budget and that the free-market is based on the consumer voting with their $$dollars$$ when they make a purchase.

So if we want to have a real free market, it is the consumer who should not be taxed. That will enable to consumer to make the most efficient use of their money.

Posted by: SteveR1 | October 28, 2010 9:14 PM | Report abuse

Justin84,

That's just federal receipts. State/local is the rest of the $90 billion.

http://www.forbes.com/fdc/welcome_mjx.shtml
http://www.usgovernmentrevenue.com/yearrev2009_0.html

U.S. corporate income tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion

Posted by: krazen1211 | October 28, 2010 9:59 PM | Report abuse

Justin84,

That's just federal receipts. State/local is the rest of the $90 billion.

http://www.forbes.com/fdc/welcome_mjx.shtml
http://www.usgovernmentrevenue.com/yearrev2009_0.html

U.S. corporate income tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion

Posted by: krazen1211 | October 28, 2010 9:59 PM | Report abuse

"more hidden taxes like the corporate tax"

@RichardHSerlin,

I'm not sure the corporate tax is a good example of a hidden tax. Corporations are very much aware of and respond aggressively to taxes.

"VAT, so that you earn the same take home pay, but you don't dwell as much on the taxes you are giving up"

There is something to this, but I think structure matters. If the VAT is structured progressively (different rates on different items of exempting certain products), people won't need to dwell on taxes to notice a household earning $100,000/yr isn't much better off than one earning $60,000/yr in terms of consumption.

While consumption taxes are undoubtedly better than income taxes from this perspective, I fear that excessively progressive taxes will eventually change the culture so that work effort falls.

http://www.themoneyillusion.com/?p=4692

I think you are correct to consider the income effect as well as the substitution effect, not to mention psychological issues but looking across countries, the substitution effect seems to dominate over the long haul.

Posted by: justin84 | October 28, 2010 10:01 PM | Report abuse

krazen1211,

Good color. I stand corrected.

Still, it's important to note that the corporate income tax normally raises a lot more in revenue. It was $370 billion back in 2007 per the US government revenue site.

Posted by: justin84 | October 28, 2010 10:23 PM | Report abuse

"I don't understand why income capital (investment income) is taxed at a lower rate than income from actual work."

Capital, and investing to grow the capital stock, are very important determinants of an economy's potential output and future growth.

Capital IS taxed higher than labor income in most cases. The capital is taxed via the corporate income tax, at an average rate of around 25% per the BEA, and then 15% further when dividends are paid or capital gains are realized. Consider it in the context of a wage earner making $80,000/yr. Taxing this person's income at 25% and then what remains by another 15% brings it down to $51,000. That's equivalent to a 36.25% flat tax. Know many wage earners in favor of replacing the current tax code with even a 30% flat tax?

Most years, large concentrations of capital also face estate and gift taxes.

The low rate on capital gains also reflects the effects of inflation. If an asset appreciates by 20% during a period with 10% price inflation, a tax of 15% reduces the after tax return from 20% to 17%, bumping up the real tax rate to 30%.

As for private equity and hedge fund carried interest, well that seems to be a loophole. Easier to get those if you are rich and connected I suppose.

"I believe that this provides an disincentive for children of the wealthy to work for their money."

People who aren't inclined to work are probably going to be hard to budge via taxes. If your investment income is $750,000/yr, a change in taxes from 15% to 40% probably isn't going to get you on monster.com. As RichardHSerlin noted, there are income effects, and people who aren't working at all presumably really don't like work and would probably need to be impoverished in order to get back into the game.

"This provides a tax shelter for income earners and provide incentives for the lazy rich to work for their money."

The cost of reduced investment by the lazy rich almost certainly exceeds the benefit of getting the lazy rich (which is a small subset of the actual rich - most rich people work) into a job.

It might not seem fair, but the lazy rich kid's parents (or grandparents) worked hard for their money, and if they want to use it to spoil their kids its none of our business. The real tragedy in my eyes is you are getting up at 6am and working until late morning for the government.

Posted by: justin84 | October 28, 2010 10:50 PM | Report abuse

me thinks enormousturnip hasn't heard of an lllp (or just llc). you want limited liability and pass through taxation, well there you go.

at least some readers like justin84 make these comments worth reading.

Posted by: stantheman21 | October 29, 2010 12:21 AM | Report abuse

also, im pretty sure the cbo has released working papers showing that labor bears like 70% of the incidence of corp. income taxes... see, e.g., http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf

Posted by: stantheman21 | October 29, 2010 12:28 AM | Report abuse

The corporate income tax serves as a pretty effective cartelizing device.

First of all, its main effect is to heighten the difference in privilege between firms that pay it and those that don't.

If you look at the largest corporate tax expenditures -- the R&D credit, accelerated depreciation, interest on debt, etc. -- the corporations most likely to pay little or no tax are capital-intensive, tech-intensive firms heavily leveraged from mergers and acquisitions. And if you think about it, the practical effect is exactly the same, in mathematical terms, as if you started from a corporate tax rate of zero and then imposed a punitive tax only on those firms *not* pursuing that business model.

So the corporate income tax functions, to a large extent, as a punitive tax on firms in what James O'Connor called the "competitive sector" and benefiting the monopoly capital sector at their expense.

The injustice is only heightened when you consider that the corporations in the monopoly capital sector are able to use administered pricing to pass along what little taxes they pay to the consumer. It's heightened further still when you consider how much federal spending goes toward subsidizing economic centralization and large-scale organization.

Posted by: freemarketanticapitalist | October 29, 2010 12:49 AM | Report abuse

I'm actually a big fan of this concept. Right now, businesses are doing a fantastic job ducking their tax burden. If we could shift it to mitigating some of the worst corporate practices by placing taxes on carbon emissions, companies that don't provide health care, etc, it makes it an escapable tax burden by mitigating the underlying practices.

On top of that, I would rather have the rich hide their money in a company. If they're using a company as a tax shelter, it's an investment- computers, wages, or growing the company. If we had an extremely high marginal rate tax burden on short-term income and incentivized long-term deffered compensation, we may get better long-term corporate governance, more investment in workers, and a more equal distribution of wealth.

Posted by: MPaulGriffith | October 29, 2010 2:37 AM | Report abuse

Good God, letting that dimwit Atlantic columnist's thoughts pollute the Washington Post. I would say this is a grave disappointment, but Fred Hiatt is a much larger one.

Posted by: norbizness1 | October 29, 2010 8:49 AM | Report abuse

It's true that the rich, the really wealthy, pay little or no income tax because they invest in tax-free municipals. It is the up-and-coming entrepreneurs who are mostly affected by higher individual tax rates.

Why not have each corporation report its quarterly earnings per share, just like they do now, but have the tax on that earnings paid by the shareholder? Whether the shareholder is American or not, he has to pay on the increase in his wealth;

Yes, end the corporate tax which is unbelieveably burdonsome to companies. I have read that the tax return for General Electric is 7000 pages long. So what if it can afford to hire thousands of accountants, why should any company have to do this when there's an easier way for the government to collect a slice?

There is more that needs to be done, to simplify and flatten and broaden the individual income tax too. But once people start thinking about ending the corporate tax, then other sacred cows can be considered as well.

Posted by: JBaustian | October 29, 2010 9:38 AM | Report abuse

Businesses influence Government decision making through financial contributions to their cohorts in Congress. They prefer to go that route rather than to carry their fair share of the Federal Financial obligations. They use loop holes and and guile to avoid paying their fair share and want the middle income tax payers to pick up the burden. When are we going to wake and take care of our own interests?

Posted by: fasm7700 | October 29, 2010 11:04 AM | Report abuse

Businesses influence Government decision making through financial contributions to their cohorts in Congress. They prefer to go that route rather than to carry their fair share of the Federal Financial obligations. They use loop holes and guile to avoid paying their fair share and want the middle income tax payers to pick up the burden. When are we going to wake and take care of our own interests?

Posted by: fasm7700 | October 29, 2010 11:05 AM | Report abuse

Every complexity in the tax code favors the wealthy (businesses or individuals) who have the lawyers and accountants to find and exploit all the tax advantages. In the end, corporations really don't pay taxes.... they are passed on to the customers.... who also, ultimately bear the administrative burdens of corporate compliance with these tax codes. That's right, ultimately WE are paying (in higher prices) for the accountants and lawyers who find all those loopholes for the wealthy elites.

Ordinary people would benefit from abolishing corporate taxes, so long as individual income taxes are properly structured, and huge loopholes for the very rich are closed.

Simplify, simplify, simplify... not just the tax code: end government "revenue sharing", too, so that, at every level, the government agency, federal, state or local, that provides any given service, is the one responsible for levying the taxes to support that service. If the city is to be responsible for providing a service, then let the city be responsible for raising the money to do so.... and the same with counties and states. Let Congress raise the money for the federal government, only... that would itself end most pork barrel politics.

Posted by: Iconoblaster | October 29, 2010 12:20 PM | Report abuse

As a conservative, I could go along with the elimination of corporate income taxes if we tax all the dividends paid out to investors at a higher rate.

Posted by: gfafblifr | October 29, 2010 1:46 PM | Report abuse

So many people just miss the crux of the issue.

Clearly not many understand business economics

Corporations DO NO PAY THE TAXES.

let me repeat that one more time in case someone missed it

CORPORATIONS DO NOT PAY TAXES

and as you all wind up to call me any and everything in the book - go back to basic economics.

THE END ITEM CONSUMER PAYS ALL TAXES

Think it thru - and any business person will get this in a second.
Congress - made up of individuals who never ran a business will never get it.

If I am running a company, and you tax me 2, 3 5 times what I am taxed now - all I do is raise my price on the product to you, the consumer.

If you don't get that - ask a smoker what happened when the tax on a pack of cigs went up over .60 under Obama

or

watch what happens when the gasoline tax is raised, the tax on oil is raised.

People - please stop the foolish debate on how much, where or how taxes will be levied. You are playing mental gymnastics or conducting a mental self pleasuring exercise.
The consumer always pays for increased benefits, higher wages, state and federal fees, taxes and what ever.

NO MATTER WHERE IT IS COLLECTED, ALL TAXES ARE PAID BY THE CONSUMER.

And why does manufacturing move off shore?
Because the overall cost of set up, overseas manufacturing, plus tariffs shipping and handling is less than the cost of U S manufacturing.

Welcome to WalMart - the shelves are full of proof for that statement, and the parking lots are full of people who demand the best price, no matter what.

Posted by: JohnSpek | October 29, 2010 2:16 PM | Report abuse

We should get rid of the IRS, and move to the "FairTax" as described in the book by the same name, which eliminates the tax code and has everyone, including busineses and corporations of all sizes paying their taxes just as individuals do and at the same rate. Get a copy of the book and read it, you will fall in love!

Posted by: Cawdorinc | October 29, 2010 3:23 PM | Report abuse

First of all, "Fair Tax" is the biggest tax giveaway to the wealthy imaginable. If one believes, as I do, that economic growth originates in the middle class rather than the wealthy, the Fair Tax would be a crippling economic blow to our country.

That said - What is this love of tax relief for corporations? If you want no taxes on your company before you get your share - invest in a company where you take personal responsibility, have personal risk, and are personally rewarded. Perfectly acceptable. It is also acceptable to invest in an institution that is treated as a separate legal entity for purposes of lawsuits, judgements, and for tax purposes.

But there's this wonderful mythology that has risen in which it is utterly unfair to treat an organisation that is its own legal entity for purposes of risk and lawsuit under the exact same standards for tax purposes.

If we reward people by instituting a legal separation when convenient to protect the wealthy, but ignoring this whenever that separation inconveniences them, why should *anyone* take personal responsibility?

Posted by: Jonnan | October 30, 2010 3:19 AM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge washingtonpost.com's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.




characters remaining

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company