Should there be a tax on corporate income at all. For and against.

by on October 23, 2017 at 1:20 am in Economics, Law, Uncategorized | Permalink

That is a reader request.  I used to think the ideal tax rate on corporations should be zero, but that is no longer my view.  For one thing, too many individuals would find ways to self-incorporate, thereby avoiding personal income taxes on labor income.  Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.

Furthermore, tax-exempt institutions such as non-profits and pension fund would end up owning too many corporations, to the detriment of (non-tax) efficiency.  While pension funds eventually must pay out that income in the form of pensions, those often go to high-wealth, low income elderly individuals, and thus would never end up taxed at such a high rate.

I now think that for the United States the tax rate on corporate income should be in the range of 18-25 percent, depending of course on what other decisions we make with our budget and tax systems.  It also would work to simply target the OECD average of the corporate rate.

A further question is whether the case for a zero corporate rate would be stronger if we shifted from income to consumption taxation.  That depends how easy it might be to partially evade the consumption tax, say by spending money abroad.  In general, to the extent evasion is possible that favors lower marginal tax rates but levied on a greater number of distinct points in the system, including in this case on the corporate veil.

I thank Megan McArdle for a useful conversation related to these points.

1 A Truth Seeker October 23, 2017 at 1:29 am

I think it is clear the American government has become a net welfare loss enterprise, a jarring shadowof its own former self. Why give it more money than strictly necessary? While Mr. Trump twitters, Communism overruns Indochina and the Korean Peninsula. I tried to use the NTIS site, but now it only works for Washington fat cats and their cronies seeking “partnerships”. In Brazil, such a mockery eould not last a second.
The government in A,erica has ceased to served the little guy (and the little gal) on the streets. Now, it only serves itself and the happy few who bleed its teats dry.

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2 dearieme October 23, 2017 at 6:30 am

“While Mr. Trump twitters, Communism overruns Indochina and the Korean Peninsula.” Really? What do you have in mind?

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3 A Truth Seeker October 23, 2017 at 7:15 am

South Korea being Finlandized by China and North Korea and Red China violations of Vietnam’s rights for example ( https://www.cfr.org/report/china-vietnam-military-clash ). Naked Communist aggression remans unanswered because America’s commander-in-chief is too busy twittering and his government is too busy borrowing Chinese money and bowing before Beijing. There were a time when Washington would send a few black ships to Asia and it would have been the end of it, but now Washington seems uncapable of dealing with the new realities, challenges and issues of the most populous continent.

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4 dearieme October 23, 2017 at 7:25 am

“South Korea being Finlandized by China and North Korea”: perhaps so but Finland isn’t communist.

“Red China violations of Vietnam’s rights”: but Vietnam is already communist.

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5 A Truth Seeker October 23, 2017 at 8:34 am

After America abandons South Korea, for how much time will democracy survive there? When a selfish America blames its allies and consorts with its enemies like a King Lear?

The Vietnamese people has been building a free, democratic and sovereign society. To achieve this end, it has had to resist the pressures of Beijing slave masters and their red imperialism.

6 GoneWithTheWind October 23, 2017 at 11:14 am

I favor zero corporate/business taxes for American companies inside America. The simple reason is it will bring a sustainable boom to our country that would benefit everyone and could potentially eliminate poverty. The left wants the opposite. That is they would prefer a slow to failing economy because it makes their voter base dependent on their largess AND it punishes the middle class who often votes for their opponent.

“the tax rate on corporate income should be in the range of 18-25 percent” It simple depends on how much you want to suppress the economy. If you want full employment then lower the tax. If you want full dependency on welfare than increase the tax.

Regarding “tax-exempt institutions” revoke that part of the tax and civil law and allow charities and all endeavors to exist under the same rules. And of course end the charitable deduction.

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7 A Truth Seeker October 23, 2017 at 11:56 am

“That is they would prefer a slow to failing economy because it makes their voter base dependent on their largess AND it punishes the middle class who often votes for their opponent.”

I don’t know. I think frequently calls for tax cuts are weapons of self-interested malefactors of great wealth, moneychangers who shoukd be driven out of the temple of civilization. The poor don’t seem to fare well in American booms.

I think it would be better to spend the money fighting Communist in the Korean Peninsula and in Indochina and restoring NTIS. But since those seem now far-fledged prospects, I think there is no reason to take this money. Or maybe it coukd be used to reduce America’s dependence on Beijing’s ill-gotten money.

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8 GoneWithTheWind October 23, 2017 at 3:21 pm

“The poor don’t seem to fare well in American booms”

I could not disagree more. America’s “poor” are the economic equivalent to Europe’s middle class. Our “poor” often have a car, two big screen TVs and air conditioning. The fact is in a booming economy most people ‘fare” according to their effort. So there is a germ of truth in your statement; that is in a booming economy productive people do well and unproductive people continue to sick off the government teat and nothing changes for them.

“I think it would be better to spend the money…”

This seems to imply a zero sum game. It is likely that if the economy booms that the federal revenues will increase even if corporate taxes are reduced to zero. But my goal is not to increase or even to necessarily decrease federal revenues but rather to increase opportunity and prosperity for all Americans. One would think that shoould be the federal governments goal as well. But it doesn’t seem to be.

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9 A Truth Seeker October 23, 2017 at 4:25 pm

“I could not disagree more. America’s ‘poor’ are the economic equivalent to Europe’s middle class.”

If Europe’s middle class had to live amidst crack dealers… Actually, I have been told NYC cops are so poor they can not afford live in Manhattan, the famous and densely populated borough. It seems to be true. Almost half can’t even live in NYC proper!! https://www.villagevoice.com/2016/10/21/interactive-map-shows-where-nypd-officers-live/
And well, the average Americans already had more confort than the average Europe in the early 1900s (Trotsky compares his apartment in NYC – even fugitive Trotsky could live in NYC by then!! – with what he was used to in his Western Europe exile). Brazilian writer Erico Verissimo compared the American worker’s conforts with the European worker’s in the 1940s. Woitinsky made similar remarks. All before all that trickling down stuff. Yet, much people could not share in the benefits of the American system, the forgltten men and women of America, the downtrodden masses. It is no surprise that the Nation of Islam prospered by giving American opressed Blacks a new identity and a reason to live.

I think it is hard to believe the American bottom quintile has benefited at all of all the booms America has gone through after the end of the 1970s stagflation. Maybe America has an anormal number of wreckers, slackers, black guards and termites, but maybe fault is not (entirely) in themselves.

America can not live without its semicolonies such as Japan, South Korea, Taiwan, the Philippines, Mongolia, Honduras, Nicaragua, and allies such as Vietnam, Cambodia, Laos, France and Italy. Allowing Communist to spread to those countries will prove to be a very expensive and deadly mistake.

10 Real Talk October 23, 2017 at 5:44 pm

There’s something wrong with you.

11 A Truth Seeker October 23, 2017 at 6:24 pm

It is not his fault. He has been fooled by his government and his press. The American government and the American press have turned against the average American.

12 GoneWithTheWind October 23, 2017 at 10:39 pm

“There’s something wrong with you”

LOL For wanting a substantial tax cut for the productive and for business so that our economy can grow and everyone can benefit from the resulting boom in the economy? Wait! Is that you Karl Marx come back from the grave?

Perhaps you could expand on your comment which I can only assume will either verify you are a red diaper baby socialist or an uninformed lefty loon. Either way it should be interesting… .

13 byomtov October 23, 2017 at 10:47 pm

I favor zero corporate/business taxes for American companies inside America. The simple reason is it will bring a sustainable boom to our country that would benefit everyone and could potentially eliminate poverty.

Got logic?

I favor 100% corporate/business taxes for American companies inside America. The simple reason is it will bring a sustainable boom to our country that would benefit everyone and could potentially eliminate poverty. The right wants the opposite.

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14 GoneWithTheWind October 24, 2017 at 11:20 am

There are only two rational ways to tax business:
1. No tax on business and simply tax income. This would still tax a business of course but only when the profits are actually distributed as in wages, interest or dividends. This method would not stifle business at all and would have the side effect of dissuading counter productive spending intended to only reduce taxes.
2. Tax businesses at some rate and that rate is determined by not being so low as to not be worth the trouble or so high that it stifles business so much it creates a recession. This is kind of a juggling game played by dishonest politicians and the people who suffer are the workers and business owners. Think about the basic premise: it is like a parasite that lives by sucking the life blood from the host. But if the parasite becomes too greedy it kills the host. So business taxes are reduced to simply trying to extract as much money from the economy as you can without killing it. DUH! Wouldn’t it be better to allow the economy to grow unfettered by bloodsuckers?

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15 fwiw October 24, 2017 at 4:52 pm

To call you a moron would be charitable.

16 GoneWithTheWind October 24, 2017 at 10:04 pm

“To call you a moron would be charitable.”

Thank you! I will assume you are a liberal/socialist/communist at heart and my job here is done and my point is proved.

17 Ahmed October 23, 2017 at 1:44 am

I see no mention in this article about corporate tax incidence.

Corporations earn their returns on equity after all costs, including the cost of taxes. As such, corporations remit taxes but they don’t actually bear the costs of taxes. Also, as corporate taxes are actually consumption taxes, that makes them regressive.

On another note, there have been a lot of articles in the media recently about the breakdown of whether it is capital or labor that bears the cost of corporate taxes. How come consumers are never mentioned?

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18 Bill October 23, 2017 at 7:31 am

The benefit of corporate taxation and your incidence argument is that we can tax foreign consumers, and not just US consumers, if the tax is “passed on” by corporations. Also, corporations use infrastructure and governmental services just as much, or perhaps even more, than consumers.

I also like the argument that we should not tax foreign earnings of US corporations. Great. More reason to move abroad.

These are not arguments you would here on this site, but its fun to point them out.

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19 OldCurmudgeon October 23, 2017 at 9:54 am

>I also like the argument that we should not tax foreign earnings of US corporations.
>Great. More reason to move abroad

I think that tends to cut the other way….It’s the high U.S. corporate rate + world-wide basis that’s encouraging U.S. corporations to move to low-tax countries, invest abroad, and/or keep piles of cash abroad. All to the detriment of the U.S. worker when competing for internal investment.

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20 Albert October 23, 2017 at 10:27 am

I think it’d be better to only tax businesses, not people. Any dollar a person pays in taxes is a dollar they don’t spend, so really the incidence of personal taxes falls mainly on businesses in the form of reduced demand.

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21 Ricardo October 23, 2017 at 11:11 am

Your claim that corporate taxes are regressive depends on two unstated assumptions. Corporate taxes imposed on your local private jet rental company may well wind up taxing consumption but the effect would not be regressive. And, as always, the incidence of the tax depends on relative elasticities of demand and supply.

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22 Misha October 23, 2017 at 1:45 am

Or can dividend imputate per Australia to effectively eliminate “double taxation”

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23 Bill October 23, 2017 at 7:42 am

Funny you should say that.

Back when Bush/Cheney were looking at reducing the tax on corporate dividends (before they settled on the 15% rule), they considered a proposal which would offset corporate tax payments from the distribution so that there wouldn’t be double taxation.

The trouble was: many corporations didn’t pay taxes, or very little taxes.

Here is a tax note written at the time written on double taxation. A little wonky, but understandable: https://www.urban.org/sites/default/files/publication/58846/1000777-The-Administration-s-Proposal-to-Cut-Dividend-and-Capital-Gains-Taxes.PDF

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24 Mark Thorson October 23, 2017 at 10:50 am

Which raises one of my pet peeves. Why do any corporations even pay dividends? I hate that. It just makes my income tax filings more complex. Why don’t they just take any extra money and buy back shares? I want to see my equity increase, not get some taxable income.

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25 msgkings October 23, 2017 at 12:21 pm

It is a mystery why corporate America doesn’t model their operations on the specific desires of Mark Thorson.

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26 mulp October 23, 2017 at 12:59 pm

By the same logic, why is interest paid on any loan, aka savings account, bond, money fund?

Given people are willing to give money to a corporation for nothing in return, why shouldn’t all money be given away with nothing in return?

In fact, your taxes would be simpler is your employers paid you nothing.

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27 Mark Thorson October 23, 2017 at 1:42 pm

If I buy shares in a company, my profit comes from the increase value of those shares. That’s not taxed until I sell, and if I hold long enough I pay the much lower capital gains tax. Getting this taxable nuisance income is less desirable than if the same money was put into raising the share price. Buying back shares is how a company can pour any extra money into the share price. That’s what I want.

28 Oleg October 23, 2017 at 2:00 pm

Robert Lucas called eliminating the tax on capital income (i.e., not corporate income tax) the closest thing to a free lunch he had ever seen. Isn’t that what you’d prefer? That’s not discussed here, but a zero rate capital gains tax sounds like a much better idea.

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29 Mark Thorson October 23, 2017 at 4:28 pm

I can see the justification for that. Because I already paid income tax on the money used for investment, why should I pay a tax again on what I do with that money? But I also see the other side, which is why should capital gains be taxed any different from ordinary income? It’s actually the latter which I think is more morally justifiable. It’s also more politically acceptable, if you’re a Democrat or Socialist, so raising the capital gains tax to be equivalent to the tax on oridinary income would probably be easier than many other tax code changes. I suppose I’m biased because I made a lot of money going in and out of the stock market, often holding a position for less than a week, and I was taxed at the ordinary income rate. Why is the government encouraging >1-year investing? Isn’t a fluid market more conducive to rapidly reaching market equilibrium? And isn’t that a good thing?

30 Floccina October 24, 2017 at 9:56 am

Because they do not have great investment options.

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31 BC October 23, 2017 at 2:22 am

“That depends how easy it might be to partially evade the consumption tax, say by spending money abroad.”

Scott Sumner has suggested implementing a consumption tax by removing all contribution and distribution limits on IRAs. That seems to be a pretty solid way to prevent tax evasion, at least for traditional IRAs. To consume, one would first need to withdraw funds from the IRA, triggering taxation on the withdrawal. How would one manage to consume (spend) money in the IRA without actually spending money in the IRA, especially since one cannot borrow against IRA assets? If evasion would be a problem, then why aren’t we already seeing it, i.e., why aren’t we already seeing retirees avoid taxes on IRA withdrawals while paying for consumption somehow using funds in the IRA?

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32 liberalarts October 23, 2017 at 7:10 am

The unlimited IRA is only a partial transition. To make our income tax a consumption tax, we would also have to tax borrowed funds the same as earnings or IRA withdrawals. “Don’t worry sir, while you will have to borrow $700,000 to pay for your $500,000 house, you will get to deduct your mortgage payments from future income/consumption taxes.”

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33 BC October 23, 2017 at 12:47 pm

Where do the borrowed funds come from? Think of borrowing and lending as trading the timing of consumption. Person A earns $100 now and B earns in the future an amount with $100 present value. (Use present value for all amounts to avoid mentioning interest separately.) B would like to consume now and A would like to consume in the future so A lends to B. Suppose tax rate is 20%.

1) If A lends directly to B, without going through an IRA, then A pays income tax on the $100 and lends remaining $80 to B. In the future, B earns $100, pays income tax, and uses remaining $80 to repay A, who consumes it. Both $100 amounts are taxed. A and B both consume $80 present value.

2) If A deposits $100 into IRA and IRA makes loan to B, then B borrows $80 from A’s IRA. (B knows that he can only afford to repay $80 in future after paying taxes.) B earns $100 in future, pays $20 in taxes, and repays $80 to A’s IRA. A withdraws $100 from IRA in future, pays $20 in tax, and consumes remaining $80. Again, both $100 amounts are taxed, and A and B both consume $80 present value.

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34 Floccina October 24, 2017 at 10:05 am

Wouldn’t all income go to these IRA like accounts.You would then be allowed to withdraw as much as you want each year from your IRA but would be taxed on total withdrawals for the year. So if you buy a home you would get a loan and be taxed on the IRA withdrawals then you would take to make the payments. It would be more complicated if you wanted to buy a home with cash because presumably we would not want to push people who buy homes for cash into a higher tax bracket than those who borrow, thereby favoring debt.

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35 Doug October 23, 2017 at 3:23 am

“Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.”

How specifically? I mean other than illegally, of course.

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36 yo October 23, 2017 at 8:49 am

Company car (or jet?). Lunch at the office. Combining any private vacation with nominal business travel – and expensing. Having your company rent an office of which you’re the owner. Selling intellectual property to your company, which can expense it. Having your wife and kids “work” on your payroll, and expensing it.

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37 JWatts October 23, 2017 at 9:30 am

“Having your wife and kids “work” on your payroll, and expensing it.”

Then your wife and kids are subject to payroll and income taxes. That would actually raise your effective tax rate.

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38 yo October 23, 2017 at 1:06 pm

They usually earn less. In a progressive tax system their tax rates are lower. Granted, worse than zero, but generally better than 39.6%

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39 Doug October 23, 2017 at 4:25 pm

I don’t think it works that way, at least not with a spouse. The married filing jointly brackets are double the brackets for single or married filing separately, so if anything, there would be an income tax disadvantage if the wife didn’t make enough to max out the second highest bracket, added to which would be the disadvantage for the second payroll tax.

40 Floccina October 24, 2017 at 10:07 am

All of that can be done now with an S Corp which pays not corporate taxes.

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41 Engineer October 23, 2017 at 9:44 am

Company provided cellphone (which you are required to carry at all times to be available for business), subscriptions to publications useful to your business (e.g. the WSJ is ~ $500/yr, and arguably useful to your consulting business), personally computer (which of course you use only for business). Then you get into the whole “incidental personal use” area.

It’s pretty minor dollars, but maybe attractive in a sideline business … if you make the taxes high enough, it motivates people to establish sideline businesses mainly for tax avoidance purposes.

You might also find that your business needs memberships to various clubs (I understand a golf club membership can be significant in some places). Beach house or yacht for entertaining clients. Business meals. I believe in England, in addition to company cars, some people got company bespoke suits.

I used to (decades ago) have a company car. I had to track company / personal mileages, and paid the personal share of operating expenses. Admittedly about 90% of the mileage was business, but for 4 years I didn’t have to own a personal car.

My wife is a CPA. Some, interesting stories. A lot of people are very aggressive about claiming deductions. Hillary Clinton years ago famously claimed 50 cents of value for Bill’s used underwear when donated to Salvation Army.

One of the great advantages of uniform and low tax rates is to remove the incentive for all that gaming of the system.

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42 Ricardo October 23, 2017 at 11:27 am

Most of the issues you cite are inherent in any tax system that taxes business profits and not revenue (e.g. any tax system that respects the value of entrepreneurship). Once you allow business expenses to be subtracted from revenue, you need a fairly nuanced set of rules to define what a legitimate business expense is and a way to distinguish business expenses from personal expenses.

Low rates do not solve the problem: if there is a flat tax of 15%, a business owner with $1 million in profits is still going to owe $150,000 in taxes and will surely be tempted to spend energy and resources to reduce that six-figure tax bill.

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43 Engineer October 23, 2017 at 12:19 pm

Agree, but if the tax rate is 40%, the incentive to spend energy and resources is considerably increased, and with more room for professionalized avoidance.

A lot of that professionalized avoidance is widely perceived as unjust, even if technically legal. And to most people the line between many of the “technically legal” practices and straight cheating is pretty arbitrary. I think that’s bad for the polity over the long term.

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44 Doug October 23, 2017 at 2:13 pm

That all seems like pretty petty stuff (with the exception of the beach house or yacht, which seems not very realistic for most small business owners, and doesn’t really get the income out of the corporation, since the corporation still holds title to the asset), and I believe in most cases if it isn’t recognized as income to someone who receives it directly from the company, then it would have been deductible anyway if the person had simply been paid cash and bought the stuff himself. So I don’t see how any of this “returns real income to you.”

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45 Harun October 23, 2017 at 6:55 pm

Its like Megan Mcardle and Tyler Cowen don’t actually own businesses.

And are unaware that the IRS actually reviews people’s taxes all the time for just these dodges.

Sure, if you’re a movie star you can deduct a lot of fun stuff.

If you’re just a small business owner, you will be told by your CPA that a company car is not worth the deduction unless you’re driving a lot. You’ll be told that your home office deduction is also rather a pain.

Also, its hilarious to watch the tax nannies wag their fingers at companies deducting too much, and then next week advocate for a tax cut to stimulate business consumption. (Cowen and McArdle don’t do this, but Obama did this exact thing: rail against corporate jets and then offer a favorable tax wheeze if you bought one…c’mon government – is business the devil or not?)

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46 Harun October 23, 2017 at 6:57 pm

So, let’s say there is no corporate income tax. You’ll still need to keep books.

And the IRS will want to see them when they audit your income.

Just like if you’re a laborer who works off books to avoid taxes.

Do we not tax income because Ashok can ask to be paid in cash when he removes the tree from your yard?

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47 Vivian Darkbloom October 23, 2017 at 4:01 am

The corporate income tax could be reduced to zero if all corporations were treated as pass-thru’s. However, for a variety of technical and practical reasons (too lengthy to discuss here), that is not feasible. Under the current regime, many businesses have the option to be treated as pass-thru’s (e.g., LLC’s and partnerships) and thus taxed only once at the individual rate, but for most publicly traded and very large entities, entities with foreign shareholders, etc., that is not possible or practical. One could also consider an imputation system such as used by the UK, but that is also messy.

The ideal system should treat all income at the same rate, regardless of the form of business. Currently, corporate income (including distributions) is subject to a higher rate than income from non-corporate entities. The federal marginal rate is currently 48 percent (35% + (.20 x .65) = 48%) compared with a marginal rate of 39.6% on ordinary income. These rates should be equalized and, preferably, the rate of corporate tax and the rate on distributions should also be roughly equal in order not to discourage corporate re-investment over distributions or vice versa and therefore avoid undue distortion regarding decisions on the allocation of capital. Thus, at the current marginal rate of 39.6%, the current proposal of a corporate rate of 25% would roughly achieve this with the current dividend marginal rate of 20% (25% + (.20 x .75) = 40%). Progressitivity can be acheived (as it currently is) through progressive rates on the dividends/capital gains.

As someone who spent an entire professional career in the business, I find it amusing and naive that economists who lack any detailed knowledge of the Code or pratical experience with its administration think it’s easy to radically “simplify the tax code”, make it “fair” to everyone, eliminate all tax avoidance, all at the same time! The three are simply not feasible simultaneously. As a wise man once said, “the life of the law has not been logic, but experience”.

The experience has also been that we need more than one type of tax in order to prevent the inevitable tax planning around one or the other. The system is complicated, but it is a result of a considerable amount of trial and error and political compromises. It can be made better, yes, but Trump’s promises are more credible than those who promise a one page tax code.

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48 SamChevre October 23, 2017 at 9:55 am

I have long proposed something similar.

I would tax GAAP income. (This has the advantage of limiting tax planning via income management, since GAAP income is widely reported and most constituencies want it to be high.)

I would tax GAAP income, for the entire enterprise, on a “percentage of revenues from the US” basis. (This eliminates the whole issue of transfer pricing, which is an endless source of both controversy and manipulation. This change puts the US on a more similar basis to the rest of the world; income from an I-Phone made in China and sold in China shouldn’t be taxed in the US.)

I would tax GAAP income for the entire enterprise, from US revenues, and not distributed as dividends, and tax dividends as ordinary income to recipients. (This change would enhance the value of tax-deferred savings such as 401(k)’s; trying to get a similar effect by changing the individual-income tax rate for dividends lowers the value of tax-deferred individual accounts.)

I would tax GAAP income for the enterprise, from the US, not distributed as dividends, at the same rate as an individual taxpayer would pay: in most cases, that will be the top marginal rate. This means that keeping money in a corporation does not defer taxes.

This set of changes would be intended to reduce the incumbent advantage: a corporation financing a new venture would face the same set of taxes on investable capital and earnings as an individual investor.

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49 Vivian Darkbloom October 23, 2017 at 10:17 am

“I would tax GAAP income”.

What most people don’t realize is that the “effective tax rate” has nearly as much to do with how “income” is measured under financial accounting as it does with how taxable income for tax purposes is calculated and the statutory tax rates. (which is a more accurate assessment of that nebulous concept of “income”?). “Effective tax rate” is measured against the income for financial accounting purposes. International tax issues aside, if taxes were imposed on financial accounting income, the “effective tax rate” would always be the same as the statutory rate.

Making taxable income equal to financial income would not only close the effective tax rate/statutory tax rate gap, it would discourage companies from artificially boosting their financial reporting income to please investors and markets. Forget about the idiotic and politically-motivated term “loophole” which is completely beside the point.

One problem is that the government does not directly control the accounting rules, while they have complete control over tax rules. Also, the tax code is used for purposes other than raising income–it is used to favor industries and pet projects as well as to try to regulate the business cycle. It would be better that they got out of those businesses.

Your comment is a good one, although I don’t think it addresses the question presented. If we were to move taxable income closer to financial statement income, though, the statutory rate could be lowered very substantially.

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50 Joan October 23, 2017 at 11:29 am

A long term look at business’s response to changes in the tax rates and rules can be seen at .visualizingeconomics.com. The share of business income reported as corporate profit is now half what it was in 1980 and the number of listed companies on the stock exchange is declining.

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51 mulp October 23, 2017 at 1:16 pm

Inome is very misleading when talking about corporations.

Tens of millions of workers, maybe a hundred million, have no income, and many net losses, using the definition of income used in business.

Ie, their operating expenses exceed their gross revenue.

Household debt does not increase faster than gdp while net worth falls to zero or negative if workers have positive income on a median $50k household gross revenue.

52 Vivian Darkbloom October 23, 2017 at 1:01 pm

By the way, I’m ignoring the current medicare surcharge of 3.8 percent on investment income which I hope and expect would go away under any reform.

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53 Bill October 23, 2017 at 4:07 am

Do corporations use governmental resources and/or infrastructure?

Yes or No?

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54 NPW October 23, 2017 at 7:56 am

Do corporations pass on their costs, including taxes, to consumers?

Yes or No?

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55 Bill October 23, 2017 at 8:09 am

Shouldn’t they. By the way they pass it on to owners of capital as well. And, best of all, they pass on the tax to foreigners and foreign investors as well.

Imagine a world in which an individual could eat at the table and not pay a bill, whether they passed on the costs or not. Free lunch for corporate america, which is pretty good at getting the politicians it wants.

By the way, if you live in a community which has non-profits which do not pay property taxes, or in a community with state government offices, they do not pay taxes either, but they get police, fire, road and other services.

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56 The Other Jim October 23, 2017 at 8:27 am

>Free lunch for corporate america

It’s clear that Bill doesn’t get it, and he never will.

But I’m posting because he accidentally said something relevant, which is the “non-profit” scam. People are avoiding taxes to pay themselves six- and seven-figures, and calling it non-profit.

Most of these are lefty institutions, so the Dems will never touch them. But it’s low-hanging fruit for Trump. I hope he calls them out.

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57 Bill October 23, 2017 at 8:50 am

Jim,

I am currently reading a book on the use of language by the alt-right and far right political parties in Europe. I’ll add: “doesn’t get it” and “lefty institutions” to the list of the words or phrases people use.

We can have a civil discussion.

58 mulp October 23, 2017 at 1:18 pm

Do corporations give their goods and services for public services and defense for free?

Ie, do construction companies build roads, bridges, schools for free?

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59 MOFO October 23, 2017 at 9:45 am

For a lot of infrastructure, wouldn’t it be better to charge them as they use it? My company car costs the same to license as the same car owned privately, or, at least, it should.

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60 Oleg October 23, 2017 at 10:17 am

When I take my dog for a walk in the park, my dog is using the park. Should we tax my dog to cover for the cost of maintaining the park, or just the dog’s owner?

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61 mulp October 23, 2017 at 1:22 pm

Cleary, the person who benefits from your dog not messing up their yard should pay for the park where you walk your dog.

You are bearing a big cost burden already by walking your dog instead of just letting him out to run into other people’s yards and mess them up.

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62 Harun October 23, 2017 at 7:00 pm

Most government spending is now transfer payments.

Does a corporation really use “social security” or “Medicare?”

That’s a good question.

But please, let’s stop lying that somehow government spends 90% of its funds on defense, cops, courts, and roadz.

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63 Bill October 23, 2017 at 7:39 pm

Most government payments are transfer payments.

False.

And, besides, they are not transfer payments anymore than an insurance policy that I buy is a transfer payment to the person who files a claim.

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64 Mike W October 23, 2017 at 6:11 am

I don’t know enough about macroeconomics, music or ethnic food to evaluate most of TC’s posts but, I do have some expertise in tax and my impression of his views on this subject is that they are weak on the facts.

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65 Matt Stiles October 23, 2017 at 11:53 am

So, you’re saying he’s complacent?

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66 Potato October 23, 2017 at 5:03 pm

That’s the Straussian reading.

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67 dearieme October 23, 2017 at 6:29 am

“tax-exempt institutions such as non-profits and pension fund would end up owning too many corporations” Proposition: the US has far too many tax-exempt institutions.

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68 liberalarts October 23, 2017 at 7:30 am

I actually don’t know how the U.S. compares in this. Here, all charitable nonprofits, such as university endowments, church endowments, museum endowments etc. are exempt from taxes on their dividends and capital gains. They are also more or less exempt from taxation on their operating profits, because they are neither allowed to pay dividends to owners or sell stock or ownership that would allow for capital gains and rather have to use the money to fulfill a mission that in some way benefits the public. My sense is that American nonprofits have more than Europe where you live (for now I guess we will call the U.K. Europe…), but their function in Europe is largely replaced with a larger (and also) untaxed government. In the case of pension funds, in the U.S. these are not necessarily tax emempt, but they hold tax deferred investments on behalf of workers who must pay taxes on pension income (same as income) when they receive it in retirement. Thus, we allow workers to smooth consumption across their lives (both employment and retirement) by deducting savings put into pension funds, but then taxing it when withdrawn. This pension/IRA money is thus technically taxed, but a 20, 40, 50 years deferral is very valuable to real investment returns for individuals.

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69 chuck martel October 23, 2017 at 10:19 am

Perhaps in abstract terms some ostensibly non-profit entities, say Harvard University, justify their tax status by their contribution to society generally but it’s not possible to determine how much in concrete terms. Taxed corporations fit the same model, selling a product or service, just as Harvard does, which benefits society in difficult to measure ways or members of society wouldn’t make the exchange. As in all things government, the benefits in totality are abstract, the costs are defined.

The system currently in use has almost all of the elements of fascism as it’s ordinarily defined. The government’s ability to skim a portion of the profits from business while at the same time regulating business activity and decision-making makes it a part-owner of the business.

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70 mulp October 23, 2017 at 2:10 pm

It is possible to quantify it. After Howard Hughes created HHMI to laminate all tax payments, Congress closed that tax dodge in successive laws closing loopholes his lawyers, and then his foundation directors found.

All tax exempts must register and file with the IRS, with maybe a loophole for religious groups with only limited property assets, a homeless shelter building, meeting house, etc.

They must file a simple accounting of income, spending, assets, liabilities, and statement of the purpose of each, operations, raising money, and delivering the not for profit mission.

And the minimum amount spent on the mission in the charter qualifying for tax exemption must be at least 85% of 5% of net assets, by 1969 law.

Corporate charters almost always are very broad, like “advance medical science or other furthering of human potential”, which means the directors can fund ad campaigns for natural botanical memory boosters without mentioning brands, or for tax cuts and eliminating government as long as it is not political, but merely advocating and educating the public on the greater human potential of anarchy.

Only a few charters were very restrictive, like fund a scholarship for a white Catholic man with parents or grandparents from Ireland, born in Sisters of Mercy hospital, which is impossible because either the hospital was torn down, the hospital serves only blacks, the only college bound kids are women, etc. Trustees end up going to probate court with a charter change based on a modern mission consistent with the original, like give scholarships to children of immigrants, or give scholarships to people from the community.

I think of Howard Hughes after many PBS science programs because he unintentionally funds them long after his death thanks to his tax dodging efforts and Congress closing tax dodges and loopholes he famously used.

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71 SamChevre October 23, 2017 at 3:38 pm

That brings to mind my other much-desired change to tax law: I would require charities to do one of the following:
1) Meet an increased minimum spend (probably 6% plus market returns on long treasuries–about 9% now), and exclude from credited spending all payments to a household greater than 3x the median household income: this is designed to mean that constant fund-raising is necessary or the charity’s assets will be depleted)
OR
2) Pay members of no single household more than than 2x the median household income (this is designed for the small charities that need to operate in perpetuity–cemeteries, historic sites).

72 rayward October 23, 2017 at 7:33 am

I am always amused when I hear or read a politician (or an economist for that matter) complain that our tax system is too complicated and puts us at a disadvantage with China. You think our tax system is complicated, take a close look at China’s. Of course, our tax system is complicated in a way that differs from the way China’s tax system is complicated because ours is a consumption based economy and theirs is a production based economy. Pity the president and congress that adopt policies that cause a spike in the price of a Mercedes, Lexus, or BMW. By contrast, the government in China can impose policies that promote whatever the government’s goals, which today are production and export. Pity the consumer in China who has other priorities. We exist in a global marketplace, and U.S. companies take advantage of it including employing techniques to avoid U.S. corporate taxes. The president and Congress could adopt policies to make avoidance more difficult, but they won’t; indeed, the executives of the U.S. company that is the king of tax avoidance were greeted by Republicans in Congress as heroes. The techniques U.S. companies employ aren’t that complicated (like putting a patent in a file drawer in a tax haven and apportioning a large slice of income to the file drawer, I mean the patent). By contrast, China’s techniques for achieving the government’s priorities (again, production and export) might be viewed as not only complicated but preposterous. For example, if the producer of some goods in China wishes to sell them in China rather than export them, the producer must first load them on a ship, transport the goods to a port outside China, and then return the ship to a port in China to unload and distribute the goods in China. A patent in a file drawer is far more efficient, even if it’s a fiction.

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73 mulp October 23, 2017 at 2:23 pm

The real irony is the claim tax taxing the money NOT PAID TO WORKERS kills jobs due the tax burden because 35% is higher than the 17% tax on business tax China levies, which is PRIMARILY a tax on money PAID TO WORKERS.

And the money overseas will be paid to US workers if the tax on money NOT PAID TO WORKERS is cut, because bringing money back to the US and paying workers is taxed at zero, and that kills jobs.

The problem is the unfair US tax dodge of getting to deduct labor costs from revenue to compute income. In China, only money paid to Chinese businesses is tax deductible, and money paid to workers and non China businesses is taxed at 17% as income.

Clearly, US business tax code needs to close the tax dodge of deducting labor costs from income to compete with China and Germany.

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74 Heath White October 23, 2017 at 7:34 am

The reason not to tax corporations is that ultimately the tax falls on some individual, so just tax that person.

The reason TO tax corporations is that corporations shield individuals from liabilities, e.g. in bankruptcy or in lawsuits. This has quite a lot of value for individuals (hence the popularity of incorporation) and since it is value provided by the state, there is no reason not to tax it.

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75 Bill October 23, 2017 at 7:43 am

Great. If what you say is true, if a US corporation manufacturers here or abroad, and sells abroad, we are taxing FOREIGNERS.

Love it.

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76 Harun October 23, 2017 at 7:01 pm

I’m going to blow your mind. You’re a foreigner in other countries and they are taxing you back.

Except they don’t because everyone else is territorial.

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77 Vivian Darkbloom October 23, 2017 at 7:51 am

1. “…so just tax that person”. Please explain how, absent a corporate income tax, the US is going to effectively tax foreign investors, if they invest via a US or foreign corporation. This is a major practical problem of eliminating the corporate income tax completely. It would be very difficult to get one’s ounce of tax flesh out of non-US investors and put them on equal footing with US investors (the same issue arises with a system relying solely on consumption tax). It would be very impractical to abrogate the 68 or so bilateral tax treaties the US is party to today or the treaties of friendship and commerce.

2. I don’t see limited liability or bankruptcy as an issue. On the one hand, many here are arguing that if there were no corporate income tax, more people would stuff money into corporations even if not needed for the business (of course, these same people are blithely unaware of the personal holding company rules). Increased funding of corporations would increase the corporate pot for settlement of creditors claims, not decrease it, as compared with the status quo. Second, one can (with significant exceptions) have limited liability today without paying corporate income tax (LLC’s or LP’s).

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78 OldCurmudgeon October 23, 2017 at 10:10 am

>the US is going to effectively tax foreign investors

One way would be mandatory withholding on distributions. As a practical matter, this might even result in slightly greater tax income, as some percentage of entities won’t fill out the paperwork necessary to claim the resulting credits.

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79 Vivian Darkbloom October 23, 2017 at 10:32 am

We already have mandatory withholding on distributions. The statutory rate is 30 percent (dividends, interest, royalties and on what we call “FDAP”–fixed, determinable, annual and periodic income”). As I indicated at comment 17, we’ve got a lot of treaty commitments. Those limit the rate of withholding tax to, generally, 5 percent on dividends paid to foreign corporate investors (15 percent on portfolio investors) and zero on interest and royalties and other FDAP. In short, not easy to abrogate those treaties and there would be other (negative) consequences if that were done. It would upend the entire global system. Sometimes, it’s better to try to play within the existing global system.

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80 OldCurmudgeon October 23, 2017 at 1:26 pm

Fair enough, but that cuts both ways. It means we have the business/government processes in place already.

FWIW, modification is likely better/easier than abrogation. Much of the pre-work has already been done under the rubric of trying to “eliminate tax havens.”

81 mulp October 23, 2017 at 2:52 pm

Remit mandated tax withholding to the nation tax authority of the shareholder determined by the tax filing of the shareholder declaring nationality. All the other nations can refund the withheld tax to their residents.

Base the withholding on business profits, ie money not paid to workers or other taxed entities, eg US suppliers, whether the businesses pay dividends or not. Impute the profit as per share dividends.

This means the poor suffering widow with 10,000 Apple shares her janitor husband bought by scrimp ingredients and saving in the 80s and 90s will get the income tax free because we know poor suffering widows pay no taxes because they are so poor. Bonus, she can file a 1040 to get the tax withheld by Apple back, letting her by a dozen donuts with the refund.

After all, that’s the argument I heard for decades, 50s, 60s, 70s, for not taxing dividends. Dividends go primarily to old, poor, retired people, mostly widows.

82 Harun October 23, 2017 at 7:02 pm

I am a shareholder in a Taiwanese firm.

As a foreigner, they withhold 20% of any distributions.

This is not rocket science.

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83 Bill October 23, 2017 at 7:59 am

There is a BIG difference between corporate tax rates, and effective rates AFTER deductions. When you look at OECD countries effective rates after deductions place the US differently than those which have lower nominal rates.

US effective rate: 18.8; Japan 21.7; Germany 15.9.

Here is an article which is a fact check which is the source: http://www.npr.org/2017/08/07/541797699/fact-check-does-the-u-s-have-the-highest-corporate-tax-rate-in-the-world

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84 Vivian Darkbloom October 23, 2017 at 8:15 am

Are those figures the “effective tax rate” on the domestic earnings of US corporations or on the global earnings of US corporations?

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85 Bill October 23, 2017 at 9:11 am

Vivian,

I know there are several other articles on this subject besides the one that is cited. Here is a White House and US Treasury report which includes effective rate comparisons within OECD countries:

https://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-Business-Tax-Reform-An-Update-04-04-2016.pdf

Ironically, it is the Obama administration push for corporate tax reform (reducing rates and deductions).

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86 Vivian Darkbloom October 23, 2017 at 9:33 am

Was that an answer to the question whether the effective rate cited was for US domestic or global income?

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87 adam October 23, 2017 at 2:20 pm

The answer is that he has no idea. He’s just going throw around statistics without a clue about what they actually mean.

88 Bill October 23, 2017 at 7:40 pm

Adam and Vivian, I assumed you read the link and apparently did not.

89 Potato October 23, 2017 at 5:11 pm

Either you’re being intentionally misleading, in which case shame on you.

Or, you don’t know anything about corporate finance. I’m betting the latter.

It’s like a Vox article on military strategy. They definitely looked some stuff up on wikipedia and google searched NPR military. But they’re out of their depth.

Donny, you’re out of your element. Back to pseudo Haikus about your feelings on Trump.

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90 Bill October 23, 2017 at 8:32 pm

Potato, You are just sprouting nonsense with words like “intentionally misleading”; claims that I do not know anything about corporate finance, unaware that I have both taken courses in it as an undergraduate and as a lawyer in the corp finance course; claiming someone is out of their depth because they present evidence that you cannot dispute.

Are you a Russian disinformation troll? All the tactics you use without any information point to it.

Say something substantive and be civil.

91 mulp October 23, 2017 at 3:03 pm

So, why is business tax revenue so much higher in Germany than the US?

Ah, in Germany, labor costs are not tax deductible like in the US.

Eliminate the tax dodge of deducting labor costs and lower the rate to 15% to be lower than all competitor nations while increasing tax revenue!

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92 The Other Jim October 23, 2017 at 8:00 am

Both of your complaints about a zero rate are certainly fixable. That’s a cop-out on your part.

Still, I’ll settle for you publicly admitting that 18-25 is preferable. Good on you.

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93 Bill October 23, 2017 at 8:21 am

I think this discussion of corporate tax rates totally misses the point because there is no discussion of industry specific tax deductions or techniques that multinationals and others use to effectively reduce or eliminate taxes…while smaller corporations do not.

It has been my experience that larger multinationals who have all sorts of ways to reduce taxes compete against smaller corporations who do not. They then acquire them, transfer some IP assets abroad, do some financial gimmickry, and the transaction almost pays for itself.

Let’s look at both RATES and DEDUCTIONS and tax avoidance techniques. Maybe an AMT for corporate taxation.

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94 mulp October 23, 2017 at 3:09 pm

Switch to VAT in the US. Like all the nations Trump and Bannon et al claim are screwing US with export subsidies. Then the US will be subsidizing exports too, and taxing imports just like they do.

After all, US exports sold in Mexico get taxed at 16% but Mexican exports bought in the US are untaxed, just like goods made in the US by big global corporations with lots of tax lawyers and lobbyists are sold in the US without paying taxes.

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95 Potato October 23, 2017 at 5:18 pm

Yes, the old CAPEX deduction trick! And depreciation!

Those wily bastards in the (industry progressives don’t like, let’s go with oil) that use government “subsidies” (normal deduction of depreciation and CAPEX)!

How dare they invest billions to achieve their 6-8% profit margin! Robber barons! Thieves!

The large profit companies in 2017 are not the ones spending billions on equipment. Obviously. They’re spending nothing and reaping the gains from network effects. And they are virtual companies.

Facebook ain’t deducting billions a year in depreciation. The “effective” tax rate shit does not take into account the industry.

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96 VTProf October 23, 2017 at 8:26 am

No if the trend towards consolidation and concentration is reversed. Otherwise yes.

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97 Crikey October 23, 2017 at 9:14 am

Australia’s effective corporate tax rate, that is, what is actually paid, is supposedly 10.4%.

In the United State’s is apparently 18.6%.

Interestingly, Italy’s is negative 23.5%.

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98 JB October 23, 2017 at 9:17 am

Your core argument seems to be that eliminating the corporate rate would increase tax avoidance. It strikes me as hard to believe that tax avoidance would be worse under a system of individual as opposed to corporate taxation. Yes, some people might try to self incorporate to avoid taxes, but I don’t think that would be nearly as wide spread as the lobbying, inversions, tax haven offices, and other shenanigans contemporary corporations engage in. Maybe we could limit self-incorporation by requiring all corporations to employ at least two people or pay a fee.

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99 JB October 23, 2017 at 9:19 am

The corporate tax rate should be 0%. Corporations only exist on paper. Therefore, any tax levied on businesses must ultimately be paid by people via higher prices, lower wages, or lower returns to equity. If we assume that the bulk of corporate taxes are paid by corporate shareholders (a dubious assumption), then corporate taxes are probably progressive (as people invested in the stock market are likely to be relatively affluent). However, these taxes are only progressive in a very crude and imprecise way. Because corporate taxes are collected at the level of the business as opposed to at the level of individual shareholders, this kind of tax does not distinguish between middle class savers who own a few thousand dollars worth of stock and magnates who own billions of dollars worth of stock. If you were to buy shares in Microsoft, both you and Bill Gates would lose the same 35% of your share of the profits to the IRS. We should be clear about who we are taxing and why. Therefore, if you wish to tax rich people, you should tax rich people directly. Taxing fictional entities like corporations only creates confusion and hides the true cost of government. What is more, corporate taxes are uniquely damaging to growth. Growth is driven by investment. If a business wishes to invest in capital equipment, worker training, or R&D, it must raise funds to do so. One way it can do this is by issuing equity. Investors purchase equity because they expect a return on their investment. Effectively, corporate taxes reduce the return on investment by reducing after tax profits. This makes investors less willing to invest and take risks. As a result, financial capital becomes scarcer and more expensive. As a result, corporate taxes are a tax on the exact investment activities that create growth. Additionally, corporate taxes increase macroeconomic volatility. Companies can raise capital either by assuming debt or by issuing equity. Corporate taxes are levied on the return to equity (dividends) but not on the returns to debt (interest). This makes taking on debt a relatively attractive means of raising capital. In effect, this results in a effective subsidy to corporate leverage. High amounts of leverage impose a significant amount of risk on society. If the nominal price of assets falls, then businesses begin to deleverage by paying down debt. This can crowd out actual spending. This can result in a prolonged shortfall of aggregate demand (see great recession/ Asian financial crisis). Lower levels of leverage are safer. Therefore, the government should not encourage businesses to assume more debt than they otherwise would. People sometimes support corporate taxes because they don’t like big business. However, corporate taxes are likely to make big businesses bigger by fostering economic consolidation. This is because corporate taxes penalize businesses for returning profits to shareholders. Imagine you are an investor and you plan to reinvest any stock returns. One option you have is to encourage management to pay dividends (or repurchase stocks). This increases your investment income and enables you to reinvest this income yourself. You might put the money into a startup or into a business into a different sector. However, if you receive returns as income, before you reinvest, you must pay 35% in corporate taxes and a further 15% tax on any dividends. This dramatically reduces the amount of money you have left to invest. Therefore, you might be inclined to encourage the managers of the company you have already invested in to use any extra funds to expand either by acquiring competitors, increasing market share, or moving into new sectors. Instead of investing in new businesses, you encourage the old businesses you have already invested in to grow larger. Finally, corporate taxes encourage businesses to engage in wasteful tax avoidance behaviors. Most corporations have entire departments dedicated to finding loopholes. They lobby governments, open offices in Ireland, and engage in all kinds of paperwork shenanigans. These activities are profitable for businesses (because they cost less than taxes). However, from the perspective of society, they are completely useless. Developing clever ways to dodge taxes doesn’t create any new wealth. Time businesses spend avoiding taxes is time they don’t spend developing products, increasing efficiency, or enhancing capacities. If the corporate tax rate were zero, businesses would have no incentive to dedicate valuable resources to tax avoidance. Therefore, there would be more wealth and we would all be better off

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100 chuck martel October 23, 2017 at 10:27 am

Yes

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101 mulp October 23, 2017 at 3:17 pm

So, if a corporation simply collects and holds trillions of dollars in profits that are never paid to workers or shareholders, say a shareholder like the dead Howard Hughes, everyone benefits? Customers benefit for paying 200% of costs for goods and services. Workers benefit from being paid 50% of the money paid by customers. And the government benefits from HHMI buying US Treasuries after it can’t buy anything else with its untaxed profits, eliminating the need for taxes to fund government spending.

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102 Oleg October 23, 2017 at 9:36 am

I am honoured that my request was deemed worthy.

I note with some interest that the post is all contra with no pro. You say “I used to think the ideal tax rate on corporations should be zero.” Why? Perhaps it is too obvious to mention, but the post leaves one with the impression that there is no upside to not taxing corporations on their income.

Further, all the contra arguments appear to suggest that the sole purpose of a corporate income tax (other than raising revenue to pay for government spending) is as a policy instrument to prevent the avoidance of personal income tax.

I would have thought that if the problem with a zero corporate tax rate is that people will exploit it to avoid/reduce personal income taxes, surely the ONLY (or best, or “least bad”) solution to that problem cannot be simply to impose a hefty corporate tax.

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103 StrossTalebBot October 23, 2017 at 9:16 pm

TC seems concerned with the tax evasion possibilities. Aside from a Broken Windows effect, it’s not obvious that we should care unless TC is explicitly discarding Tiebout as taxes paid and taxes evaded are part and parcel.

Provided that Tiebout is discarded, then TC’s recommendation of cartelization via targeting the OECD average is no longer shocking.

So, new question is what’s wrong with the Tiebout model?

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104 collin October 23, 2017 at 9:48 am

A further question is whether the case for a zero corporate rate would be stronger if we shifted from income to consumption taxation.

Two main reasons for corporate taxation:

1) I believe our Military budget is 40% too high to protect American citizens and homeland. The last $200B – $300B goes to protect interest (most corporate and business) in the world. (I wish foreign companies paid in as well.)

2) Corporations use a lot of government courts and other programs.

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105 Jim Hudson October 23, 2017 at 9:50 am

Personally, I don’t like hidden taxes.
However, the money has to come from somewhere and this tax – paid by consumers who are corporate customers – doesn’t seem too bad until one considers the impact of Corporate taxes on Corporate competitiveness in global markets. I believe that a Corporate tax rate equal to the average of our primary foreign competitors would be a boost to American companies.

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106 mulp October 23, 2017 at 3:26 pm

But my income income taxes were paid by my employer who passed the costs of my income taxes onto computer and software customers buying the production of its employees in higher prices.

If government simply enslaved teachers, road builders, sokdiers, etc, and did not tax individuals to pay educated workers living where they want, employers would cut the pay to workers reducing the prices charged to customers!

But hey, instead of paying workers, businesses can enslave workers, and then simply give production away for free!

Clearly slavery is the best way to cut costs to customers!

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107 mb October 23, 2017 at 9:56 am

returning income in non-taxable ways is already a feature of the current tax code. There are all sorts ways to try to make this less appealing – taxing company cars, etc. – but that does not mean it makes it less appealing. Everything bought by the “company” can be expensed and deducted from income as well as depreciation if applicable, and every person that owns a company exploits that to a maximum advantage. As an example my friend owns laundromat, he has vending machines that stock just about anything – fruit, sandwiches, etc. – how much fruit do you think he sells at the laundromat? Pretty close to zero. Makes no sense to stock it, except his family eats fruit, and all the fruit they buy, is bought by corporation for the vending machines. This lowers his corporate income and returns money to him tax free. I would be willing bet he finds some way to deduct spoilage. We won’t even get into the % quarters he actually claims as income.

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108 Mark Brimmer October 23, 2017 at 10:08 am

For. Tax all gaap income, regardless of entity, one time, at one rate.

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109 Anonymous October 23, 2017 at 10:13 am

“In general, to the extent evasion is possible that favors lower marginal tax rates but levied on a greater number of distinct points in the system, including in this case on the corporate veil.”

Go all the way. A tiny tax on all interparty transactions. As your payroll flows to the bank, as you pay the rent, as the landlord pays the mortgage, as you buy and sell stocks, etc., etc.

Not just a VAT, not just consumption, bigger and more inclusive.

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110 chuck martel October 23, 2017 at 10:29 am

They’re working on that.

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111 Anonymous October 23, 2017 at 10:35 am

It could be transparent, with one click YTD totals for an individual or institution. No filing.

Has anyone modeled anything like this?

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112 CG October 23, 2017 at 10:13 am

As Tyler demonstrates, the best arguments in favor of the corporate tax are not economic at all, but political.

Yes, if you wanted to impose a tax on labor or shareholders or consumers, it would be more efficient to tax them directly rather than indirectly via the corporate tax. But none of that matters if you couldn’t otherwise pass or collect those taxes. All of those are politically unpopular. You’d also have to figure out the exact mix of the incidence on each set of individuals (workers, shareholders and consumers). The corporate tax is a politically popular and convenient way to raise revenue across all those groups. And if kept to a reasonably low level (say 10-15%), the distortionary and anti-competitive effects are minimal.

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113 ant1900 October 23, 2017 at 10:27 am

Corporations are inefficient at “paying” taxes (the incidence) because the tax is just passed to employees and customers.

But they are incredibly efficient for tax collection. They have valuable assets and much to lose if they fail to pay their taxes.

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114 efcdons October 23, 2017 at 1:27 pm

It’s weird how corporations that don’t have to actually pay any taxes (since they can pass it all on to employees and customers) spend so much money and energy trying to lower corporate taxes. One would almost think these taxes actually do impact owners of capital and that’s why they want to lower corporate taxes. Or maybe the owners of corporations are just really nice people and want to help out us non-owners by lowering our taxes even when corporate taxes don’t hurt the owners of the corporations.

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115 spencer October 23, 2017 at 10:34 am

The effective tax rate — corporate taxes as a share of corporate profits — is now at 21%,
down from 50% in 1950.

Sounds reasonable at first glance. But if you dig deeper it may not be so reasonable.
The 21% is an average of much lower rates for large multinational corporations while small business pay at near the statutory rate. Maybe this widening spread between taxes on large and small firms is one reason the small business growth has weakened over the years.

A few years ago the Treasury published a study where they found that US effective tax rate is very similar to the effective tax rate in most other OECD countries.

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116 anon October 23, 2017 at 11:02 am

Related, 60% of Americans are takers.

https://twitter.com/timoreilly/status/922428144526688256

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117 anon October 23, 2017 at 5:49 pm

For what it is worth, I think what this slide implies is that if you want to approach the tax ideal that “everyone pays something,” you are going to have to radically restructure costs of living.

If shacks pass building codes, you will have fewer sleeping in cars, and less need for rent assistance.

Of course you will have more accidental deaths as well. A tradeoff.

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118 ohwilleke October 23, 2017 at 11:33 am

The tax on corporate income is necessary to prevent corporations from being an easy means to indefinitely defer income. This problem isn’t solved unless corporate tax rates approximate the top individual income tax rate.

The problem with the U.S. corporate income tax is not that its rates are wrong, but that it isn’t integrated with shareholder level taxes as almost all other corporate taxes do. The easiest way to achieve 95% integrated corporate and individual income taxes would be simply to allow a deduction for dividends paid.

If we want to tax the privilege of being publicly held, a good alternative that could make up the revenue losses from integrating corporate and individual income taxes by imposing a property tax payable by corporations on the FMV of their publicly held stocks and bonds, determined from a weighted average of daily market prices and paid perhaps quarterly. This would not distort the internal organization of firms and would make the fact that the modern corporate income tax is largely a tax on the privilege of being publicly held far more transparent.

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119 Dallas Weaver Ph.D. October 23, 2017 at 11:37 am

The problem is the government does need some money to do some of its worthwhile activities like national defense, enforcing the law, guaranteeing property rights, courts, and diplomacy.

As some taxes have more negative impacts than other, any shifting of taxes from more detrimental taxes to less detrimental taxes should be done. This should be the “no-brainer” level of tax reform or shifting.

For example, a carbon tax would have less negative impact on the economy per dollar of tax than most other taxes. With the huge price inelastic behavior of the fossil fuel industry, proven over the decades with price variations of 100% causing little change in the industry beyond who is cutting a fat hog, per dollar of tax a carbon tax would be less distorting to the economy than payroll taxes, or corporate taxes or income taxes, etc.

Just make a list of deductions and taxes and possibly new taxes like carbon, rainwater, mineral extractions, fisheries, and other “commons” and rank them by their negative impacts on the functioning of the economy per $ of tax and swap high negative taxes for less negative taxes. That is what we effectively did with the Regan tax reforms where we dumped a lot of special tax benefits and deductions for a lower tax rate.

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120 Potato October 23, 2017 at 5:28 pm

You’re going to shift all blue collar jobs offshore.

I mean, sure I guess. We should probably deport 60% of the country if we’re going to do this. Anyone who’s not a “knowledge” worker should have their citizenship stripped and deported.

We can get rid of manufacturing and steel production. Those take energy.

The absurd part of these proposals is that if you jack up the price of making things in the US you won’t impact consumption. You’ll just make people lose their jobs. Which makes sense in an emotional way. You hate these people so make them suffer.

Ok with me, the price won’t change much. But the trumpians will definitely get trumpier.

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121 john October 23, 2017 at 11:43 am

Why not simpify the equation and follow the USSC and treat corporations like real people and by symmitry real people like corporations. Everyone gets the same deductions and write off and rates (arguable that is not the case in the corporate tax world but probably such be much more uniform than it is). It’s also in keeping with Becker’s Households as Production Units as well.

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122 B.B. October 23, 2017 at 12:11 pm

The Hall-Rabushka flat tax plan has a business (not just corporate) tax that resembles Paul Ryan’s plan. Direct expensing of investment, and no deductions for interest paid.

But capital income received at the personal level is exempt from taxation. It was taxed once already at the business level and doesn’t get a double-tax.

I like that approach better. Instead of taxing business income at the personal level, tax it at the business level. Why? Because there are so many nonprofits, foundations, trusts, and the like that don’t pay any taxes on capital income received. We close that “loophole” by taxing all business income at the business level. Creates a level playing field, and taxes all income.

The only complication is how to treat business income from foreign businesses.

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123 Harun October 23, 2017 at 7:05 pm

If your system is territorial, then that’s not a worry, no?

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124 Donald Pretari October 23, 2017 at 12:11 pm

I’m for abolishing corporate taxes. Corporations can increase their work force, increase their investment, raise wages, with their profits. I’d like to see this. True, they can use the profits elsewhere, but I don’t like the idea of taxing possible investment. On the other hand, there are changes I’d like to make to corporations, but that is a different matter.

Once again, let me reiterate that the taxes we pay should be based upon the amount of money we want the government to spend, which is a completely different issue. Now, most of this talk about taxes is really about reducing the tax burden for certain taxpayers at the expense of others, the focus being upon the amount of taxes to be paid irrespective of what the government has decided to spend. This means a deficit between what we spend and what we raise. Personally, I don’t find the ethics of spending more than you raise appealing. As well, we do not need a tax ‘plan’. A tax ‘Plan” is a hodgepodge of taxes meant to obfuscate who’s actually paying taxes, and pretending that they are designed for helping the economy.

The real issue is spending. The real debate should be about what we want the government to do for us, with the taxes levied being pragmatically determined from some general ideas about the efficiency and fairness.

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125 me October 23, 2017 at 12:27 pm

Zero.

But, bear with me: the individual income tax ought to be set at 0 also.

In their stead, we could either have a generic transaction tax (my favorite: every time money changes hands (which in this electronic age we can actually do relatively reliably for most transactions), tax at 1%) or a tax on registered possessions (which would conveniently also solve the question who owns what but in my mind has many of the flaws of a tax on income)

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126 Vincent Kargatis October 23, 2017 at 5:39 pm

> we could either have a generic transaction tax (my favorite: every time money changes hands (which in this electronic age we can actually do relatively reliably for most transactions), tax at 1%

This is topic I’d like to see Tyler discuss. This has long seemed eminently sensible to me (easily rationalized as an “economic service charge”), and yet I see little wonkish attention to it. Implying perhaps either there’s something “obviously” flawed about it, or that it inexplicably flies below the radar of wonks.

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127 Donald Pretari October 23, 2017 at 12:29 pm

Let me put it this way…The idea that we pass laws authorizing spending and then spend our time trying to figure out how to not pay for it leaves a bad taste in my mouth. I’m for a much smaller government, by the way. Seen the Defense budget lately? That’s where I’d start.

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128 Joël October 23, 2017 at 12:41 pm

Pardon my ignorance in corporate tax law, but may I ask a very basic question to better understand this issue and debate?

Say you are the only owner of a firm. The firm makes a benefit, pay corporate income tax on it, and then give you what remains of the benefits after tax. How is this income taxed? Is it 1) not taxed at all – 2) added to your other work and capital income and taxed at the rate corresponding to your total income – 3) Something else?

Thanks a lot.

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129 Vivian Darkbloom October 23, 2017 at 12:59 pm

“the firm makes a benefit”. I assume you mean by that “profit” aka “income”.

Normally, a distribution from corporate profit (technical term “current or accumulated earnings and profits”) to a non-tax exempt entity is treated as a taxable dividend to the shareholder. Under current US law, (qualified) dividends are taxed at progressive rates (depending on the taxpayer’s total income, not only the income from the dividends). The rates are 0, 15 and 20. In addition, for high income taxpayers there is a medicare surcharge of 3.8 percent, so that with the surcharge the top marginal rate is actually 23.8 percent.

There is a lot more to talk about, but I think that’s enough for now.

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130 Matt Stiles October 23, 2017 at 1:54 pm

There’s a tax principle in Canada called “integration” which means that the effective rate of corporate taxes + dividend taxes = the effective rate of an incremental increase in personal income. It is done so that there is no apparent benefit/detriment to categorizing the income in one way or the other. In practice, however, there is more involved and those other factors still play a role in conferring special privileges to how some income is categorized.

My understanding is that the US does not have this principle as corps and individuals are treated as separate entities and taxed differently.

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131 ohwilleke October 23, 2017 at 5:09 pm

It depends upon which tax law applies to it.

Most closely held companies in the U.S. are organized as LLCs and taxed as “disregarded entities” or partnerships, or taxes as S-corporations, all of which result in income taxed only at the ownership level and taxed immediately upon being earned.

Most closely held companies in the U.S. organized as “C corporations” pay a tax on corporate profits, but pay bonuses at year end to owner-executives to greatly reduce the amount of corporate level tax due. If the after tax profits are then distributed to shareholders as dividends they are taxed again at the shareholder level as dividends, which is called “double taxation” and if they are not distributed they increase the value at the shareholder level of the shares resulting in increased value when the shares are also giving rise to capital gains taxation.

In many countries there is a mechanism to tax income at the corporate level the way that C corporations in the U.S. which it integrated with ownership level taxation, usually by treating corporate level C corporation taxes paid as a withholding tax against dividends to be distributed in the indefinite future, and the payment of after tax dividends in cash is accompanied by a statement showing the credit against taxes due at the shareholder level for corporate taxes paid, much like a net paycheck to a W-2 employee in the U.S.

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132 Doug October 23, 2017 at 8:07 pm

In most cases involving a single owner business, it would be taxed as if it were ordinary wages, and the owner would have to pay both regular income tax rates, plus the self-employment tax to make up for lost payroll taxes.

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133 Art Deco October 23, 2017 at 2:35 pm

The corporation tax strikes me as fair enough given the benefits to be had from forming an incorporated enterprise rather than a proprietorship or partnership.

I’ve had occasion to wonder if you could not replace assessments on income with assessments on equity. Say, have a publicly-traded corporation issue a stock-dividend each year equal to x% of outstanding shares payable not to extant shareholders but to a public trust. The voting rights would be in abeyance. The trust administrators would then sell the shares on the open market at an opportune time for public revenue. For a privately held firm, you might grant them a choice between an equity assessment that would be later auctioned or a flat assessment on total revenue. If you set the assessment rates correctly, the revenue stream could be equivalent but with fewer compliance costs for companies.

As for corporations organized as philanthropic entities, you might avoid finicky controversies over institutional purposes by leaving such entities in peace provided the compensation schedule for their employees was within bounds determined by a formula which made use of the agency’s FTE and the mean compensation-per-worker in the economy as a whole as arguments. There would be some compliance costs as their currently are with producing the IRS 990, but any agency without shareholders would be free of assessments unless it was paying its directors and officers unconscionable sums (in which case it would be hit hard and high). (Karl Keating and Matt Kibbe, I’m looking at you).

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134 ohwilleke October 23, 2017 at 5:11 pm

There is no longer a benefit to be had from forming an incorporated enterprise rather than a proprietorship or partnership, because you can organize an LLC or S-corporation to get the liability benefits of an incorporated enterprise without the tax consequences.

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135 KevinH October 23, 2017 at 2:53 pm

I’m glad you took on this topic and I think your analysis is pretty good except for one thing:

“Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.”

This is actually an argument FOR zero corporate tax rate. Corporate taxes are on profits. Therefore, any tax on profits actually incentivizes corporations to use these loopholes, and decrease recorded profits, more than if they had no tax on profits.

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136 ohwilleke October 23, 2017 at 5:12 pm

No. As long as there is a lower tax at the corporate level than at the individual level, there is an incentive to defer income indefinitely taxed only at the lower corporate tax rate and that is indeed what people do in practice.

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137 Floccina October 23, 2017 at 5:37 pm

For one thing, too many individuals would find ways to self-incorporate, thereby avoiding personal income taxes on labor income. Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.

How about if they are taxed like SCorps? Taxed at the individual level but in the year the profits are earned and taxed on retained earnings? This would end the double taxation.

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138 Jnny October 23, 2017 at 5:39 pm

I’d like to see a 0.1% gross receipts tax so all going corporations, no matter how clever, pay into the cost of government maintaining the regulatory and judicial structures for them. Then I’d like to see the revenue tax rate set at whatever level is required to make foreigners see the USA as a tax haven. We’ll take all your overseas investments, thank you.

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139 Jeffrey Deutsch October 23, 2017 at 6:45 pm

Next policy choice variable: How free people should be to set up S corporations — same limited liability as “regular” or C corporations, but no actual corporate income. Like partnerships, S corporations have all their income “pass through” and only be taxed after it reaches the various individuals.

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140 Pava Renat October 23, 2017 at 9:17 pm

First of all, I think all discussions of efficient taxation begin bass ackwards. I think we should start with the expenditure side. Let’s first of all eliminate all wasted and special interest outlays, beginning with agricultural subsidies, all corporate subsidies, federal welfare payments, etc. Scrub the budget down to.a bare minimum consistent with federalism, and leave the rest to the States. Then ask how the rest should be funded. Second, I don’t think there’s any good argument for a uniform tax system. Defense, in my opinion, is required to protect the wealth of the US; thus, I’d propose that defense be financed by a special, dedicated tax on net wealth, both on individuals and on corporations. After all, it’s their property we need to defend, right? Then, if indeed there are any reasons at all for federal outlays that are essentially income transfers (me, I don’t know of any, but I’m sure others do), I propose that they should be financed by special, dedicated taxes on labor income. Make them progressive, since the purpose is income redistribution, and set a high EITC. But, please, no darn unemployment insurance. Last, for all “productive” federal expenditures, like large airports, air traffic control, interstate highway systems, large electricity projects like dams, and such like, charge user fees in proportion to usage, And then institute a constitutional rule — that there will be no transfers of revenue from one dedicated source to another expenditure. I want separate tax systems depending on the purpose of the expenditure, so we can have political debates that tie revenue generation directly to the desirability of outlays. So there, that’s easy, right?

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141 Floccina October 24, 2017 at 2:45 pm

+1

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142 Nate Rausch October 23, 2017 at 9:38 pm

Surprised to not see Milton Friedman’s old idea of having “0%” corporate tax, but to have a personal tax that was flat regardless of source, including dividends.

18 % might be a good number though. 18 % flat tax on income from either labor or dividends, no corporate tax. Of course such a reform would have to come together with one to reduce loopholes for getting money out of corporations tax-free. Estonia has a variant of this, 20 % on dividends, 0 % on corporate tax. Seems to work great as far as I can tell.

Heck, combine that with a negative income tax of say $12000 / year and you got the progressive element back in as well, and everyone gets the basic income they dreamed of without much incentive changes from todays system.

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143 Deepish Thinker October 24, 2017 at 4:22 pm

“For one thing, too many individuals would find ways to self-incorporate, thereby avoiding personal income taxes on labor income.  Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.”

Why do you find this to be a compelling concern? Tax evasion opportunities will exist in any conceivable tax system. A zero corporate tax system would actually appear to improve things in this regard. Sure people could self-incorporate, but this would seem to be a manageable problem. For a start self incorporation isn’t an option for most salary and wage earners, so only a subset of taxpayers could potentially take advantage. Regulation would certainly be required for these taxpayers but it is unlikely to rival the complexity of the regulation necessary to implement corporate taxes. Also the resources currently deployed to enforce corporate taxes should be more than sufficient to intimidate most potential scofflaws.

“A further question is whether the case for a zero corporate rate would be stronger if we shifted from income to consumption taxation.”

I’d argue that if we zero out corporate taxes, and presumably tax dividends and capital gains as regular income, we’re getting something that is, in effect if not mechanics, a progressive consumption tax (call it a progressive tax on realized income available for consumption). Would this not be a good thing?

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144 Larry Siegel October 24, 2017 at 10:58 pm

The self-employed already incorporate and avoid double taxation (that is, pay out enough in salary and benefits to reduce corporate income to zero). If the corporate income tax were zero, they could do this and also allow money to accumulate in the corporation, but they wouldn’t be able to get it out without paying additional compensation or a dividend taxable as ordinary income, so I don’t see the problem.

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145 Warren Platts October 25, 2017 at 3:00 pm

The corporate income tax (CIT) could be reduced to zero in a revenue neutral manner if about a 20% across-the-board tariff on all imports was implemented. It would be a consumption tax, but only on consumption of imports; domestic production would see lower prices due to the elimination of the CIT.

The current system is actually the reverse: we tax consumption of domestic production through the CIT, while allowing imports in virtually tax free. Moreover, as someone above pointed out, some of the tax incidence of the CIT falls on foreign consumers; but the practical effect is that the CIT functions as an export tariff, raising the price of our exports, thus lowering the demand for them.

Thus, the whole system is ass-backwards, and must surely be at least partially responsible for the chronic trade deficit. If we replace the CIT with an import tariff, studies show that we can expect half to 2/3 of the tax incidence to fall on foreign producers. The reduction in imports combined with the lowering of prices for domestic production and exports will stimulate demand for domestic production, and lower the twin trade and fiscal deficits.

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146 zztop October 25, 2017 at 9:16 pm

Extend %100 expensing for %100 U.S. made machine tools put in service in the U.S., regardless of organizational size, or income status (capex can yield losses that are recoverable via carrybacks).

All problems solved for U.S.A.

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