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.
Interesting, but a couple of problems:
Buy-and-hold investing is a relic, shares are traded constantly, sometimes in a matter of seconds. Who gets the taxable income?
Lots of shares are held in pensions, IRAs and 401(k), so no tax would be paid.
But then just about anything would be better than the current mess.
@ Save_the_rustbelt: “shares are traded constantly, sometimes in a matter of seconds. Who gets the taxable income?”
I can jump in and out of ETFs/mutual funds, which have hundreds of constant inflows of dividends, interest, and cap gains. They and my broker manage to divvy out and report my share each year on my 1099.
The bookkeeping would be different, but it wouldn’t necessarily be more challenging. Possibly less so.
“Lots of shares are held in pensions, IRAs and 401(k), so no tax would be paid.”
It would be a matter of setting the proper tax rate on profits.
Since it involves wealthy individuals paying more taxes, I am sure republicans would oppose such a proposal.
No, no, no, no.
This is all backwards.
Not to mention Rube Goldbergian.
Corporations should pay ALL taxes. Of course they will “pass it through to their customers.” So what? “The markets will adapt.”
Corporations have to keep track of their incomes anyway. They have the accountants. They are big enough to negotiate with the governent, and smart enough to know the trade off is between what the Corps have “left over” to invest, and what the government needs to invest in the general welfare.
For one thing they wouldn’t commit the following confusion:
” (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?)”
The issue is NOT “we are not going to invest if you tax us.” but “if you tax us we won’t have the money to invest.” The first is crybabying that no one believes except deluded “conservatives” and simple minded liberals, bless them, who can’t manage to think except in terms set by the conservatives. The second is a matter of “of course. now lets decide how much you keep to invest, and how much we, the government, take to invest.
This would leave everyone else “freee to be meee.” Taxes and government is too much for their pretty little heads anyway.
@coberly: “Corporations should pay ALL taxes.”
I’m LIKING that! Gotta give it some more thought…
1) Corporations should not pay all taxes, as many don’t earn any profits.
2) If you believe taxes give currency its value, then we should all pay some level of taxes.
3) So do people get to deduct their share of losses from companies that lose money? I see more games/loopholes being created.
Scrap the corporate income tax for c-corps, and make them all subject top VAT. So they all pay taxes regardless of profitability.
testing
This article and others are being read ,a href= “http://nottrampis.blogspot.com.au/2013/05/around-traps-31513.html”>downunder I hope.
keep it up here please
whoopsy that is
downunder
Matt
i think you missed the point. but i certainly don’t understand your #2.
what gives currency it’s value is that people accept it in payment for all debts public and private, and because it’s more convenient than weighing gold… which also gets its value because people… and governments…
no profits… no taxes. simple.
but “people” are not going to deduct their losses from a company if they are not paying taxes. get it?
meanwhile if only corps are paying taxes, the government can concentrate on writing tax laws that prevent gaming, and the corps are big enough players that they can bargain realistically for “fair” taxation.
Coberly – taxes create demand for the currency, yes it is convenient, but ultimately you need to pay your taxes in dollars, not gold, not barter.
Government is the monopoly supplier of currency by spending (or by bank
loans, which create deposits). Taxes serve to make us want
that money. Taxes help regulate total spending, so that we don’t have more total spending than we have goods available at current prices –
something that would cause inflation. But taxes aren’t needed in advance of spending, since before the government spends there is no money to
tax. Now take that latter point and understand for increased tax revenue there needs to be more government spending. Also increased corporate profits are driven by increased government spending – especially when credit is strained. Kalecki’s profit equation shows that profit will be the sum of capitalist expenditures, the budget deficit and net exports, minus worker saving.
Basically, austerity in the form of budget cuts and higher taxes will result in lower tax revenue, lower corporate profits, lower employment, weaker social security. See Europe’s austerity disaster.
From Warren Mosler, which is a great example:
“It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British
coins. So the British placed a “hut tax” on all of their dwellings,
payable only in British coins. Suddenly, the area was “monetized,”
as everyone now needed British coins, and the local population
started offering things for sale, as well as their labor, to get the
needed coins. The British could then hire them and pay them in
British coins to work the fields and grow their crops.”
I’d be tempted to get rid of corporate taxes entirely (assuming they can be made up for in a progressive way) if only to cut down on the “corporations are people my friend” talk. Well, if they don’t pay taxes, they aren’t!
Matt, Matt, Matt…
where are you going with all this?
I was not arguing for (or against) austerity. I was just saying that if government collected all the money it needs… consistent with not starving the private sector… by taxing it from corporations, the corporations would pass through the cost to their customers.
and that would create several efficiencies, not least of which is giving the people a rest from thinking they know something about government and taxation.
currency is just a portable representation of “money.” money is what people agree to accept in return for “work” (or property which they acquired with money). as long as the government accepts money from the corporations for taxes… then the money is founded in something reliable.
i won’t bore you with my “theory of money.” but you haven’t convinced me of yours.
as far as i can tell all the functions of money and taxes as envisaged in your theory would continue to be carried out if the taxes were collected only from corporations.
if there were no government, any reliable “bank” or “business” could create money just as you envisage in your theory. the only difference would be the question of reliability. some folks think the private business would be more reliable than government. i am not sure history decides the question.
except that, as far as i know, only government can (or will) act countercyclically.
Coberly, If only corporations were taxed people would simply not incorporate.
Matt
seems to me they would lose the benefits of incorporation then.
You tax all businesses, not just corporations.
critter
that’s a slippery slope. pretty soon you’d be taxing everybody.
if i had a serious point here it would be that you can tax corporations and “the markets will adjust”: becaue the corporations will “pass through” their taxes, then everyone who does business with a corporation will end up paying their “fair share.”
in any case, NOT taxing corporations is insane.
as for double taxation: your “owning” shares in a corporation is as much “owning” (and being double taxed) as your stack of blue chips at the roulette table means you “own” the casino so paying tax on your winnings is a “double tax”.
Businesses already collect taxes from the workers salaries and sent them to the government. Call them business taxes and adjust worker salaries accordingly. 90% of the transition done!
critter
sounds good to me. just to be mean i was thinking of limiting the tax deduction to business from “workers salaries” to no more per worker than twice the average of all workers.
Coberly
I could go along with that…although I would be inclined to raise the threshold a little higher.
critter
that threshold is not “don’t pay more than this” but “don’t deduct for paying more for this.” prevents the business from paying its big people huge salaries which are not taxed.
personally i’m not so sure anyone “deserves” more than twice the average wage… especially twice the average wage of the people who work for him.
Yes, I understood that distinction.
I’d like this proposal better. Reduce corp tax to a low amount, and increase the ER portion of the payroll tax. All companies pay, and it would be reflected in labor costs. Social Security will immediately be “fixed”. Quoted, because I don’t believe its broken.