Why Libs and Cons Should All Love Milton Friedman’s Corporate Tax Proposal

I’m constantly astounded that nobody on the left or the right ever mentions Milton Friedman’s proposal for taxes on corporate profits.

On page 174 of (my edition of) Friedman’s libertarian bible Capitalism and Freedom, he proposes what seems a simple and sensible plan (transcription here):

…the abolition of the corporate income tax, … with the requirement that corporations be required to attribute their income to stockholders, and that stockholders be required to include such sums on their tax returns.

In other words, treat C-corp profits like S-Corp (pass-through) profits. Shareholders (they’re the “owners,” right?) pay taxes on them whether or not they’re distributed as dividends. Corporations would pay zero taxes on profits.

If corporations want to distribute enough in dividends to cover their shareholders’ tax bills, fine. That’s between the shareholders and the corporation.

I suggest: announce that this change will take place five or ten years hence, and let the capital markets adapt in the meantime.

Friedman doesn’t say anything about tax rates. I’d suggest taxing profits at the regular income rate or higher. (Pace the incoherent notion that taxing income from financial investments prevents people from making financial investments; what else are they gonna do with the money, stuff it in a mattress?)

Conservatives should love this proposal not only because it emanates from their godhead, but because it eliminates double taxation (profits taxed at the corporate level, then again when they’re distributed as dividends).

Liberals should love this proposal (despite its source) because it places the tax burden directly on “owners,” and it taxes corporate earnings at the same unsubsidized rate as labor earnings.

Everyone should love this proposal because it eradicates the whole public and private apparatus of corporate tax collection, and removes multiple preferential tax treatments that distort markets and keeps tax accountants, lawyers, and regulation-arbitragers burning the oil.

Issues:

In and of itself, this proposal does nothing to address the international tax dodging that is such a problem with corporate profits.

There would still remain the question of capital gains and how/if they should be taxed, which I will leave to another post.

But I will mention here, once again, that the corporate interest deduction should be eradicated (along with the mortgage interest deduction). There’s no reason for taxpayers to subsidize debt financing in preference to equity financing. QTC, in fact.

Cross-posted at Asymptosis.


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