End Corporate Taxation!

Via the Salt Lake Tribune:

Nearly two-thirds of the companies operating in the United States reported owing no taxes from 1996 through 2000, according to a recent government study.

Foreign companies doing business here were more likely than American-based ones to claim they owed no taxes, according to the report filed this week by the General Accounting Office, the investigative arm of Congress.

Among American corporations, an average of 6 in 10 reported no tax liabilities on their U.S. income tax returns filed for the five years from 1996 through 2000, the study found. The percentage of American companies saying they owed nothing increased steadily but slightly in the period, to 63 percent in 2000 from 60.3 percent in 1996.

First I support free trade, and now I’m for eliminating the corporate income tax. At this rate, I’ll have to rename the blog InstaBear.

But seriously, I think eliminating the corporate income tax in a revenue-neutral fashion (i.e., raising other taxes at the same time to leave federal revenue unchanged) might make sense for a number of reasons. Here are some off the cuff thoughts:

1. As the excerpt above makes clear, it’s not a particularly effective tax (remember the data in the article cited above are from 1996-2000, the Clinton Boom Years, so it’s unlikely that zero or negative profits are the reason companies weren’t paying taxes.)
2. While taxing money first as profits and then as income isn’t, as Republicans allege, bad because it’s “double-taxation” (just about everything in life is taxed more than once), it does complicate the tax system.
3. Eliminating the tax would reduce the incentive to move corporate headquarters overseas.
4. If corporate taxes were eliminated, then all dividend income should be taxed as regular income. This would go part of the way to achieving revenue-neutrality; the rest would come from progressive tax increases. Why progressive and not across the board? Because the benefits of eliminating the corporate income tax would accrue disproportionately to the upper brackets.
5. Corporate taxes currently generate about 20% of the government’s operating revenue, so the requisite increases in income taxes would be non-trivial.
6. Very small business owners, who by definition make less money, would benefit from having the profits of their business taxed at their personal marginal rate instead of at the corporate tax rate (35%).
7. The IRS would need to monitor in-kind compensation to make sure that income is not being disguised as business expenses.
8. Note that I’m only talking about corporate income taxes, not FICA or Payroll taxes paid by corporations.
9. Another complicating factor would be the profits of foreign-owned companies with operations and sales inside the US. One proposal is for such companies to continue paying taxes in proportion to their ownership held outside of the US. For example, if 10% of Toyota is owned by US citizens, then it would continue to pay taxes on 90% of the profits from its US operations. However, something like this would remove a lot of the simplicity from the proposed system and would likely create some odd distortions, (the Law of Unintended Consequences), so I’m unsure whether this would be worth the trouble.
10. Even the Liberal Matt Yglesias recently endorsed this, though not enthusiastically: “Nevertheless, the corporate income tax concept doesn’t make a great deal of sense to me … Eliminating the corporate income tax and replacing it with higher taxes on large personal incomes and capital gains seems like it would be efficiency-enhancing, revenue neutral, and about the same from the standpoint of fairness.” Matt also links to a CAP article with more details on corporations not paying taxes.

At this stage, take this more as food for thought than an actual proposal. I’d like to see readers’ responses and think about this for a while before coming to a conclusion.

AB

UPDATE:

WASHINGTON – The Internal Revenue Service (news – web sites) audited fewer corporations, small businesses and partnerships last year but more individual taxpayers, according to a study of government data.

Syracuse University’s Transactional Records Access Clearinghouse, in its analysis of IRS data, concluded that the audit rate for businesses of all sizes slid slightly last year to 2.1 audits for every 1,000 businesses, down from 2.2 audits per 1,000 businesses the previous year.

At the same time, the IRS audited 14 percent more individual tax returns. The audit rate for individuals increased last year to 6.5 audits for every 1,000 taxpayers.