Should we abolish the corporate income tax and raise taxes on shareholders?

Mike Lee says yes, see also Matt.  Maybe, I would like to go this route, but I’m not (yet?) convinced.  What if non-profits and foreign companies end up as the shareholders, as indeed the Coase theorem would seem to indicate?  Doesn’t that lower tax revenue because they wouldn’t be making capital gains filings?  And to some extent, isn’t the U.S. tax system then encouraging inefficient ownership and governance?

There may be an answer to this worry, but I’ve yet to see it.


I don't understand this argument. What are (taxable) US investors owning in this scenario?

Tyler is just noting that while US investors own some of Apple, not all of it, so a tax just on the part of profit they own is less than the whole.

FWIW, I have proposed the reverse. Just tax the corporation, and make dividends and capital gains both tax free (tax paid). It seems to avoid this problem.

There is no one world government and one world irs.

True, and my idea might encourage more companies to do that thing where they "sell" themselves to shell companies in tax havens.

Maybe we are back to VAT by process of elimination.

BUT "Just tax the corporation" become a broad target for political demagoguery, as "the rich" who own shares will not (directly) be paying tax on their earnings (and trying to explain, "yes they are- indirectly") is too long and too complex to fit into sound-bite attention spans.

And, BTW, what is the excuse for not adjusting capital gains for inflation? Or for taxing the imputed interest payments on zero-coupon bonds in the year they are (not) paid? And do we even want to think about why owners of mutual funds should pay taxes on the "earnings" (capital gains and dividends) even when the fund's NAV has declined?

Perhaps the broader question is whether tax policy should encourage consumption or investment, by privileging the tax consequences of one over the other? Arguably taxes on consumption are the most fair, but, they are open to demagoguery because it may leave those with large incomes, or large wealth, paying lower taxes than those with far smaller incomes (and little or no wealth).

> And, BTW, what is the excuse for not adjusting capital gains for inflation?

Why is the tax basis reset on death, even though neither the estate nor the recipient pays taxes on the gain?

exempts and nonresidents are already exempt from cap gains, so I take Tyler to mean that they'll increase their share of holdings at the expense of US resident taxpayers.

But foreigners, not exempts, pay 30% on corporate dividends (subject to tax treaties) which generates more revenue than domestic shareholding (20%). Shareholders have conflicting interests.

Besides, what will US taxpayers do with their gains? consume? Start businesses? Buy land?

Yes. Double taxation is unfair.

Besides, it would annoy the right people and that is a pearl beyond price.

It's satisfying to "annoy the right people", but we ought to resist that feeling. It would be much better to regret that anyone at all is annoyed by our ideas. And to try to sell them in such a way that they do not annoy their natural opponents. Of course a lot of opposition is intractable...but not all.

When "annoying the right people" becomes a motive for action, then we are in trouble. The level of discourse lowers so that not only opponents, but also supporters, are not thinking intelligently about ideas and are therefore buying in to stupid versions of everything.

Good comment.


Nothing more toxic than the politics of spite

Turning the other cheek is a good way to keep getting hit.

Taxation should be at multiple points and stages. This keeps the marginal tax low on any singular tax.. Low income persons taxed with consumption taxes.
The wealthier with consumption tax, income tax, estate tax and so on up the ladder to fairness and what works to make a " better society". If it is good for the society, double and triple taxes are fair . Remember 50% of voters are at or below medium income and we are in a democracy.

"Remember 50% of voters are at or below medium income and we are in a democracy."

50% of the population is indeed at or below the median income. However, the population is not the same as the voters. I suspect that more than 50% of voters are above the median income.

It's one thing for the top 49% to vote for higher taxes for themselves, it's another for the bottom 51% to vote for higher taxes only on the top 49%. Slavery and male-only suffrage also existed under democracy.

All laws coming under this administration are those being imposed by the 48% on the 52% , Trump's illusion about winning the popular vote notwithstanding.

"All laws coming under this administration are those being imposed by the 48% on the 52% , Trump’s illusion about winning the popular vote notwithstanding."

Laws have to be passed by Congress.

The specific government tax methods employed are much less important than "how much" the government extracts from the private economy overall.

Concern that "...the U.S. tax system {might} then encourag{e} inefficient ownership and governance? " is laughable. The current U.S. tax system is a bizarre, incomprehensible kluge of heavy direct and indirect levies-- that greatly distort the private economy. And does anyone here seriously believe we have "efficient" government now?

Payroll taxes are functionally and legally "income taxes" -- and they hit the bottom 49% extremely hard on the very first dollar they earn.

If one wishes to rationally reform the U.S. tax system-- corprate income taxes are no where near the top of the list of major problems.

No! Abolish corporate income tax (all business federal income taxes) and lower personal federal income taxes too. Abolish the entire legal standing and meaning of "non-profit" and tax exempt. Make the rules apply equally and universally. No more charitable deduction and no 'charitable' tax exempt status.


If there are no corporate taxes on profits, why do we need a distinction between "for-profit" and "non-profit" corporations?

No federal corporate taxes.

The point about a non-profit or charity or the many other qualifying entities is that they escape all taxes not just federal income taxes. This makes no sense. There should be equality and special interest groups should not be allowed to carve out special treatment for themselves at the expense of others.

"Double taxation" was always a math fraud. It lulls the listener into thinking that if we taxed just corps or just people it would be half as much.

How can that be, with deficit spending, a revenue gap?

"Single taxation" would have to be twice as much to be revenue neutral.

1. Double taxation doesn't seem fair or unfair.

Consider case A: A business makes a $100 in profit but then pays a special 'profits tax'. It then pays $75 to its owner who is taxed $25 leaving $50. Does it magically become more fair if the 'profit tax' is eliminated and the individual is taxed $50 instead of $25?

2. It isn't really double taxation. When Enron ripped off people, it was ended up bankrupt and it's assets down to the chairs and desks sold off to pay its debt for pennies on the dollar. But despite still owing, no one could sue shareholders who owned the company. The worse that happens to them is that their shares are worthless but a man who starts his own business without incorporating can be sued for everything he has, even stuff he didn't put into the business.

The corporate tax is currently 35%. A company pays a top marginal rate of $35 on $100 of profits. $65 is left. Assume $65 of profits are distributed and a 15% tax is paid. So an additional $10 of tax is paid for a total of $45.

But if you create an LLC the top marginal rate is effectively 41% because income is passed though to the owners and no corproate tax is paid. So if the profits are distributed through a limited liability corporation (LLC) total taxes are about $41, or 10% less than a corporation, So if you own an LLC you pay less.

LLC's, as the name implies, limit personal liability and essentially create the same legal exposure as a corporation

The reason companies largely still issue common stock and not partnership shares is are two fold:

1. The tax rate on dividends are no longer taxed as regular income but at a rate of 15% so the gap between an LLC and a corporation is no longer that high.

2. Liquidity/regulatory issues that make large LLC's harder to create than a common stock corporation.

1. Tax rates on dividends now start at 20%, not 15%.

2. States also double tax corporate profits, so plan on paying 7% at each level instead of 7% once as in the LLC.

3. The most favored for of paying out profits is as interest payments, not LLC distributions. But you need help from the banking sector to characterize profits as interest. That's how Mitt Romney got so rich.

Are you sure about 1? I'm no tax expert, but I think that the tax rate on _qualified_ dividends is the same as the capital gains tax rate, which starts at *0*%, and the tax rate on ordinary dividends is the same as the regular income tax rate, which starts at 10%.

Yes to the first part but offset the elimination of corporate taxes with significantly higher tax rates on income at the lower brackets to disincentivise low-productivity work.

Currently if a non profit is or foreign cos are involved in a trade or business they pay tax. So they generally do not own interests in MLPs. I would think those rules should carry over.

Better to just eliminate corporate and investment income taxes altogether.

Fed will raise $420 billion in corporate taxes in 2017, which is about $80 billion less than the projected deficit.

We already tried something like that. After we lowerned the tax rate on unearned income in 1981 to 50% a large fraction of corporations chose to become S-corporations and no longer paid corporate tax ( cutting revenue from the corporate tax in half) but passed profits through to owners who paid individual income tax on them. The savings rate fell and consumption increased over the following years and the government developed a chronic deficit. The shortfall in domestic in net saving was filled by foreign money that supported our trade deficit.

Those seem to be multiple unconnected issues that you've arbitrarily linked together. mulp, would have done you one better by tying it all to Reagan. And probably blaming the AIDs epidemic on the tax cuts to boot.

The savings rate fell.

What accounts are included in savings rates?

What happened to 401ks? They took off.

I'm not sure why folks say abolishing the corporate tax would benefit executives. I think the corporate tax is a means to exacerbate the principal agent problem. Getting rid of it benefits principals at the expense of agents.

If Apple's billions could be distributed to shareholders instantly without having to pay corporate tax first, shareholders may start to want that, and then Tim Cook gets a lot less powerful, because now he's not in charge of so many billions of other people's money.

Of course it's not clear that the insiders controlling the corporations will really have a strong incentive to distribute the earnings to shareholders unless we're saying that the tax rules will say the corporate income tax liability is assigned proportionally to the shareholders. If so I don't see how that's going to be anything but an account nightmare for everyone -- IRS, Corporations, Brokerages/Banks and the Investor. For example, if I hold shares of a company, say a retail company, during a period where it's mostly losing money, say the February to October period as we assume the usual story about retailers losing money all year until Black Friday. What's my tax liability? What if I'm one of those modern investors and have owned the stock ten or twenty times over the year -- typically for less than a day but perhaps sometimes for a week or so? What's my tax liability.

Seems like we need to understand that aspect to understand the incentives that are getting set for all but the big (typically institutional) investors and what the marginal impact then to investment and savings will be.


the devil is in the details.

Step 1: "we know that eliminating the corporate tax would immediately liberate every penny of American workers’ share of it, and in short order boost take-home pay in every industry across the country."

Do we know this would be a win for labor as proposed? Tax get shifted, yes, but is it clear that labor would gain disproportionately?

Why would a corporation's governance diminish due to not paying corp taxes?

Not sure he means "governance" in the traditional sense, or something more like "regulation".

The tax code is a major mechanism for regulating corporate behavior.

When ownership changes, governance changes.

Many of the same people who wish to abolish the corporate income tax because it's a deterrent to job creation don't seem the least bit troubled by payroll taxes even though payroll taxes are a deterrent to job creation. But I digress. Taxes are the price for civilization; and Cowen, wearing his economist hat, seeks taxes that are the least intrusive on economic efficiency, a laudable goal but one not shared by many of his readers or in Congress, who abhor taxes (especially those paid by themselves) and would trade taxes for more debt (to be paid by other people later) or less civilization (that they would create on their own in secure enclaves or on islands). The friend of my eight-year-old Godson once announced to everyone within earshot that I'm not a "people person". It's true: I prefer solitude over crowds, a few good friends for dinner over a party. But I favor civilization, even though I know it means a personal sacrifice (taxes) in order to promote the common good (the sine qua non of civilization). Civilization, it's what economists (such as Cowen) want.

"Taxes are the price for civilization; . . . " Agreed. I think, additionally, that the sole purpose of taxation is to raise public funds necessary to provide necessary government services that equally benefit all citizens, "the common good." Taxes/tax policies should not be used for social engineering purposes such as private home ownership or income redistribution.

Deficits are not solely resultant of relatively lower tax receipts. Public expenditures also affect the deficit/surplus equations. In a business, reduced revenues can (to a limited extent) be offset by lower (variable expenses) expenditures. Seems that cannot happen in the social contract., i.e., tax cuts need to be revenue-neutral, as if expenditures are sacrosanct.

The Founders denied (Constitution) the Federal government the power to impose direct taxation (almost impossible for a citizen to avoid) on "we the people." The big-state proponents were able to amend the Constitution so that the Federal government could seize supreme power, which was anathema to the Founding Fathers. They needed it for WWI and their progressive agenda. Anyhow, some people approve that power. Now, we have Trump (and his concept of the "price of civilization) wielding it. We survived Obama. God help us.

You sometimes go too far for me, but this is solid stuff.

Well, with the caveat that a safety net is not social engineering in my view, it is social insurance.

Ok, good point, so we agree let's not abolish all tax.

Lots of people think the tax rate (and activity of government) should be much lower than it is now. They going to be arguing against the tax in every debate, but that doesn't mean they prefer a tax rate of 0.

You are right that short-term thinking is a problem which plagues our society, but it's a bipartisan problem. Just as a conservative is too willing to run up the debt in order to cut taxes, a liberal is too willing to run up the debt in order to add a government program (and both of them probably have sky-high credit card balances).

"Lots of people think the tax rate (and activity of government) should be much lower than it is now."

This set of people tends to overlap to a large (but not absolute) degree the set of people who think Social Security should not be cut, Medicare 'cuts' by Obamacare should be restored and the US needs to spend more on the military.

In other words, this is the population who should be taken roughly as seriously as children who advocate ice cream at every meal with the added cost somewhat offset by decreasing veggie consumption.

I agree this is a problem, but I don't think this kind of "free lunch" thinking is particular to one side of the aisle.

"Not a particular problem" is not the same thing as "equally a problem"

Indeed, it is obviously more of a problem on [side of political coalition I am not on] because [I am on this side.]

Yes, tax exempt shareholders and personal holding companies are problems with individual only taxation.

An alternate formula is corporate taxation, But the entity gets a 1:1 rebate of any taxes paid, denominated in a scrip usable for paying individual taxes. The scrip can then be distributed to shareholders, though a secondary scrip for cash market would naturally arise.

Yep, this is the Australian approach (among others). Although they have some crazy laws, in general I'm an admirer of their tax and health policy.

It appears that foreign shareholders already are subject to tax withholding. Why does this not resolve your concern?

This is exactly right. The taxes are withheld directly from dividend payments and the like prior to be credited to the foreign account.

But they still do not owe as much tax to the IRS.

Problem is you under cook the tax on foreign shareholders. Do as Australia: imputation system effectively abolishes double taxation: ie. no corporate tax on Australian shareholders, effectively only taxed on dividend income / capital gains.

Non-profits and foreign owners aren't the only problem. A larger impact is tax-deferred retirement accounts and plans. Tax receipts would be shifted to the long-distant future at lower rates.

I suspect that a non profit could be taxed for unrelated business income.

I've thought a lot about tax reform over the years, particularly in early April when I'm finishing up my filing. I'm somewhat in agreement with Senator Lee and also the position of the Koch's about how bad the current tax code is. all the preferences skew business decisions all over the map and one can site lots of things in this regard. of course the double taxation of dividends, first at the corporate level and then at the individual level is just stupid beyond belief. I don't know whether the corporate tax level can go to zero but it sure can be a lot lower than it is right now. Get rid of all the tax preferences is step one. I suspect that in return for lower rates, a VAT of some sort will be required to assure that revenue flows are sufficient to fund government. It's a lot easier to bump a VAT up or down than it is to monkey around with our current tax code.

I don't worry about the non-profits and foreign holdings issue that Tyler poses. Remember, if a corporation is successful, it's employees are successful and they will end up making more money and paying more income tax. the direct linkage between employee and corporate earnings is too often overlooked when thinking about the flow of revenue.

Yes, I think the existence of 401Ks and other tax advantaged plans would likely lead to less tax collection. On the other hand those plans would probably experience a growth in their assets, which would lead to a higher tax base when they are drawn down.

"Tax receipts would be shifted to the long-distant future at lower rates."

This part seems wrong. Retirement accounts are continuously cashing out and there's no reason the median withdrawal would shift to the "long-distant" future. Also, how much lower are the tax rates at retirement? The US tax payer's average tax rate is substantially below the marginal highest tax rate for most tax payers, so the effective tax rate probably won't change much.

The rate is lower on average because, oversimplifying a little, when you contribute to a 401(k) you are avoiding taxes at your marginal rate, and when you withdraw you are paying taxes at your average rate. So assuming the rate structure and your income level stay constant, you pay less tax.

"So assuming the rate structure and your income level stay constant, you pay less tax."

Sure, but the drop is often pretty minor.


a) 10% 0K-50K; 20% 50K-100K tax bracket,
b) earnings per year of $100,000 in real terms over 30 years;
b) a savings rate of $20K (ie $60K net income, after insurance, taxes and saving)
c) After retirement an income of $80K, with $40K derived from the previous savings and the other $40K from SS

The net decrease in taxes in this scenario (which is pretty typical) would be 10% of $10K or $1K per year.

"And to some extent, isn’t the U.S. tax system then encouraging inefficient ownership and governance?"

Isn't it doing that now with a corporate income tax? The relevant question is whether we can achieve the same tax receipts with less distortion by eliminating the corporate income tax, not whether we can eliminate distortions entirely.

Not taxing my retirement is a feature, not a bug.

Although it would be yuge if they ditched those required minimum distribution requirements.

I'd like to see a good study of the exact opposite approach -- no personal taxes (income or dividend or perhaps even individual capital gains) and all taxes at the corporate level. Though I suppose one might argue looking at VAT cases would be very similar.

All the corporations would flee the US

What Tyler is describing is already happening in a significant way in the world of private equity. A lot of PE investors are tax exempt pension funds who invest as LPs in a large number of PE funds. These funds have increasingly structured their investments to take the form of LLCs, which are tax pass through entities -- i.e., earnings (even non-cash earnings) are passed onto the investors, who pay taxes at their personal income tax rates. But no corporate tax is required. The tax exempt investors pay no tax, but usually receive a distribution from the LLC for what its tax would have been if it were a tax payer (because all other equity holders are receiving these distributions pro rata). So, no double taxation and this really juices the returns for the tax exempt LPs. What would have normally gone to the government goes to them as dividends. For many PE investors, the LLC work arounds have made the corporate tax issues much less significant.

Great point.

Also, I think it is really important to recognize that the small details of how this might be done matter a lot. All things equal, I'm less concerned with Tyler's point and more interested in the potential inefficiencies of corporations retaining all their earnings. We already have one-level taxation with pass-throughs, but people are willing to choose the corporate structure anyway because you don't pay dividend taxes until you pay them or cap gains until you sell the stock. I think if we eliminated corporate level tax without more we'd see a lot of reinvestment by corporations of their earnings back into their own lines of business (or other, new lines they shouldn't be getting into, harkening back to the conglomerates of the 50s and 60s) past the point of marginal returns, when that capital should probably be distributed to the shareholders and allocated to other, more efficient firms and/or uses.

Scan PE and Hedge Fund PPMs for the terms "UBTI", "ECI" and "blocker". No business income is passing through to exempts untaxed.

I think we need to lower the C-Corp tax rate, so that C-Corp + individual taxation can compete with LLCs. LLCs are messier all around.

The narrower the tax base, the higher the rate. Please, no.

Like the idea - at the end of the day all profits are someone's income. Could result in shell games by wealthy folks though - a consistent way to prevent this might be to require a minimum number of American employees (with benefits!) for a company to be exempt from the tax.

Currently, you can locate your corporation's profits overseas to avoid the corporate tax.

Offset any shortfall with a consumption tax. It's superficially a relatively minor reform. Tax wages and lower the corporate rate.

It would be wonderful if we could zero out the corporate income tax. Everything there winds up as individual income eventually.

But it would be a sufficiently big revenue cut that it would have to be made up elsewhere, and it would be tricky to do that in a politically acceptable manner.

Some 80% of equities are in tax deferred accounts so it wouldn't matter greatly but it would make other investments like private equity and real estate more attractive.

Tax deferred is not tax free.

No, and in fact, income taxation will generally be at a higher rate, but it does remove the incentive to move taxation from corps to individuals unless what you really want is lower taxes and to not tax corps at all.

"What if non-profits and foreign companies end up as the shareholders, as indeed the Coase theorem would seem to indicate? Doesn’t that lower tax revenue because they wouldn’t be making capital gains filings?"

I took only the most basic tax course in law school. Is there something in particular, constitutional or practical, that prevents us from having non-profits and foreign companies make capital gains filings to the extent they are shareholders in for-profit enterprises?

"And to some extent, isn’t the U.S. tax system then encouraging inefficient ownership and governance?"

How is it inefficient? It's the opposite. If a Non-profit parks its money in the stock market, they're getting a higher return and the money is being used for growing businesses, until they're ready to spend it on whatever. If Americans buy Chinese products, and then Chinese companies buy American companies, what's the problem? The return for foreigners investing their dollars into the United States is less than Americans investing overseas. Euro-Disney vs Mohammad-Land. This arbitrage opportunity is a direct boon to Americans. Increasing the effect will make Americans richer.

OK yes it's inefficient. Foreigners should be dumping the dollar instead of investing it in American companies with lower returns. They should be using their own currency to invest in their own opportunities, rather than letting Americans get the higher returns, but as Americans why should we care? As for foreigners and nonprofits being worse at governance, compared to what? Trustfund babies? Day traders? Teacher's Unions? Besides, it's interesting you think that at the margin traditional investors would, as a percentage of total investors, invest less if the tax structures changed in their favor. I think you're probably right, but it's not immediately obvious. Why wouldn't nonprofits and foreigners invest using funds?

It should be done even if it isn't revenue neutral in the short term (up to 5 years). According to the St. Louis Fed, in 2015 the corporate tax brought in $455 billion dollars, less than half of last year's deficit. I have seen no evidence presented by anyone that the deficit would increase by more than $150 billion dollars/yr if you eliminated the corporate tax and taxed dividends and capital gains in the matter done today, and a lot (most?) of the proposals make them taxable as ordinary income outside of retirement accounts.

The corporate tax on income just makes no economic sense to me- it is, as someone above wrote in another context, a tax of spite, and is like cutting off your own nose.y

Here's one attempt From Alan Viard and Eric Toder to address the non-taxable and foreign shareholder issues, but they end up retaining a 15% corporate tax to do so:

"This report updates and revises the authors’ 2014 proposal to replace the corporate income tax with taxation at ordinary income rates of dividends and net accrued capital gains of American shareholders. The new proposal retains a 15 percent corporate income tax, gives taxable shareholders a credit for corporate taxes paid, imposes a 15 percent tax on interest income of non-profits and retirement plans, and addresses stock price volatility and shifts between private and publicly-traded status. The reform encourages domestic investment and sharply reduces incentives for corporate inversions. It is approximately revenue neutral and makes the tax system more progressive."

I think Estonia has such a system. No tax on retained profits, but flat 20% chargeable on withdrawn profits (not cap gains but still a corporate income tax). Regardless of whether it goes to domestic or foreign shareholders. I don't know if anybody analysed the effects but seems to work well enough for them.

Non profits should not be tax exempt when investing in companies. So this is solved

International cooperation will be the way to go. But this is hard.

I'm a tax professional in the US, and this idea would not work. The non-profit entity that owns the shares would become liable for an "Unrelated Business Income Tax" created with just this loophole in mind.

Could nonprofits and foreign owners be charged a "transfer of ownership" fee.
Maybe 15%. You could justify taxing them saying this is a replacement for the old Corporate tax that they were paying.

Note: there could be ways to game the system - but this was an initial thought.

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