Green Room

No More Gimmicks: Axe the Corporate Income Tax!

posted at 10:34 pm on June 22, 2012 by

The following is a post from my work blog, but I think it is appropriate for here. This is an issue that not only affects Missouri, but the entire country as well.

It seems that the Show-Me Institute is not alone in its desire to eliminate the corporate income tax. James Pethokoukis, a columnist at the American Enterprise Institute (AEI), lists several reasons eliminating the corporate income tax would be a good thing. Here are a few:

* The corporate income tax hurts workers. AEI economists Kevin Hassett and Aparna Mathur have found that “corporate tax rates affect wage levels across countries. Higher corporate taxes lead to lower wages. A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.”

* As (Bloomberg View) points out, “The current system often amounts to double taxation, since income earned by a business is subjected to the 35 percent corporate rate, then taxed again when it’s paid out as a dividend.”

* “Corporate income taxes have a highly significant and negative effect on long-term growth,” according to the Tax Foundation.

My colleague Patrick Ishmael and I have proposed eliminating the corporate income tax and making up any lost revenue with the elimination of economic development tax credits, which cost the state about as much as the corporate income tax generates. Not only would this have the positive impact of getting rid of an economically harmful tax, but it would reduce the government’s ability to pick winners and losers, distorting investment decisions and imperiling overall growth. Now is the right time to make this change.

Not only does the above make sense for Missouri. It makes sense for the entire country. The corporate income tax needs to be abolished and the sooner the policy makers in Washington do this (I’m not holding my breath), the better off we’ll be.

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I agree. The gov’t ends up getting over 50% of the profits in the current system and is not there with 50% of the cash when there is a loss. It makes the mafia look like a charitable organization. Not to mention that big corps get out of most of the obligations leaving it to the small businesses to pay. Now isn’t this more important to the country than say the Dream act?

In this climate, even with most people not paying taxes, the thought of letting a corporation off the hook is not going to happen.

aniptofar on June 22, 2012 at 11:00 PM

The current system has a very unfortunate side effect — because corporate profits accumulate in a company and drive up its value, stockholders will see capital gains income — and, since this is taxed at a lower rate than individual rates or dividends, CEOs are lauded to the skies for building overbloated empires of companies and ratcheting stock values higher.

If you had two companies — making, say, guns and butter — and both paid out all of their profits to shareholders, a reasonable investor might look at one paying $3 and the other paying $2 and decide that more should be invested where there is higher return. Further, this adjustment would be relatively quick.

Instead, it’s impossible to state with any great confidence what huge conglomerates like GE actually do — but as long as it is kept within the family and increases stock prices, there’s no reason to manage for efficiency.

Either retaining corporate income taxes while allowing a 100% deduction for dividends paid, or reporting all revenue through to shareholders for taxation on their returns (as S Corporations and Partnerships do today) would go a long way toward unslanting the table toward agglomeration for the sake of agglomeration, and outsized valuations for CEOs that do nothing but cram unrelated businesses in the largest possible bag.

cthulhu on June 22, 2012 at 11:27 PM

All jim-dandy to talk about what should happen. Is there anything we can do to make it a positive reality instead of just a normative theory?

gryphon202 on June 23, 2012 at 12:26 AM

To do this, we must teach people that 2+2 makes 4 when you are talking about corporate earnings. I’m far too pessimistic on this point.

njcommuter on June 23, 2012 at 2:51 AM

The corporate income tax needs to be abolished and the sooner the policy makers in Washington do this (I’m not holding my breath), the better off we’ll be.

Glad to hear you’re not holding your breath. You would be dead before I’m finished posting.

Isn’t a corporate tax basically a way for politicians to shift the taxing power? I mean, if I were able to purchase a new automobile – which by the way I’m unable to do – the taxes paid by me would be collected by the manufacturer instead of the government. That way, politicians can scream about “greedy businesses” “raping the consumer”. Another reason why we’ll never see a reform of the tax code.

oldleprechaun on June 23, 2012 at 5:58 PM

Just think of all the compliance costs that would be saved.
But I suspect the real benefit would be in ending the transfer of wealth to the politically connected via the “deductions” and “credits” in the tax code.

Count to 10 on June 24, 2012 at 2:49 PM