I was reading an article from the editors of Bloomberg BusinessWeek about eliminating the corporate tax while at the the same time raising the capital gains tax (as well as the tax on dividends) to equal the tax rate for ordinary income.
I hadn't thought of this approach myself, and on the surface, my knee jerk reaction was to approve. After all, if the capital gains tax rate is 15%, it isn't really 15% because, as many of us know, the corporate tax rate is passed down to the ordinary investor like a beat-up pair of hand-me down shoes. If Company A earns $100 of pretax income, by the time our greedy government removes its grubby paws from our wallets, we've been taxed twice before we can say Emmanuel Saez.
The corporate tax rate of 35% leaves us with $65 to play with. And then the 15% capital gains tax reduces that $65 by $9.75, leaving us with $55.25. We are being taxed at a rate of 45%, which may be a higher rate than Warren Buffett's secretary is being forced to pay.
If nothing else, the capital gains tax without the corporate tax will be a more transparent barometer for the casual observer....However, the Bloomberg article espouses the following perspective:
Although taxing capital has long been anathema to many economists -- on the theory that it discourages investment and thus economic growth -- recent studies are casting doubt on their assumptions. The Congressional Research Service found in 2010 that reductions in the capital-gains tax are “unlikely to have much effect” on long-term growth and “would mostly benefit very high income taxpayers.” Leonard E. Burman, a public administration professor at Syracuse University, has found that capital-gains rates “display no contemporaneous correlation with real GDP growth during the last 50 years.”
Where is the proof to support this contention?
This is not a new idea for Mr. Burman. As far back as January 21, 2003, Mr. Burman wrote a paper entitled, "Taxing Capital Income Once." Here is the summary of his idea:
The President recently proposed to eliminate the double taxation of corporate income. The proposal contains the germ of a good idea, but it is incomplete. Indeed, implementing it as is would be undesirable for several reasons: it would add to our burgeoning national debt and thus reduce economic growth, it would be highly regressive, and it would have little or no effect on the epidemic of corporate tax shelters—a growing phenomenon that is both inefficient and unfair. This paper proposes to address all of these deficiencies by coupling the Administration’s proposal with full taxation of capital gains upon realization. The proposal would be revenue neutral, progressive, and would do more to improve the allocation of capital than the Administration’s proposal.
The president in question was Bush, not Obama, but the quote demonstrates that many ideas float around from year to year, from administration to administration, before they build up enough steam to be implemented.
I agree with most of that- yes, eliminate the corporate income tax. Corporation (i.e. non-corporeal entities) don't pay taxes- customers, employees, and/or owners pay taxes. One of their groups is bearing the additional tax burden. Furthermore, instead of raising the capital gains rate, let's reduce the personal income tax to the capital gains rate (i.e. 15%) (ideally, I would go to zero, but that is another topic entirely). Of all the destructive taxes, taxing investment has to be pretty high on that list. Invested capital is the way to grow economies and, by extension, increase living standards.
As for the claims that taxing capital gains doesn't really discourage investment- I would suggest they take a look at the veritable algae bloom of corporations and firms that are legally incorporated based in the Cayman, Antilles, Antigua, and other tax havens as a response to the taxing policies. By accruing profits offshore, they don't have to pay, but the statisticians at the CRS still likely count that as domestic growth. Not to mention a higher tax rate reducing the viability of the unseen marginal project that would have otherwise received funding had the tax rate been lower.
Yes, enthusiastically yes. The corporate tax does not make sense. It leads to double taxation. It doesn't raise that much money for the government. It makes the US less business friendly.
Kill the estate tax too. And capital gains (or at least equalize the equity vs. debt financing from a tax perspective).
Tax income, if you must. Better yet, tax consumption. Add a big VAT.
All taxes are ultimately paid by consumers. Corporations are just groups of people working together. Walmart, though legally a person, is not a sentient being. The money that a corporation pays to the government is reflected in higher prices or lower wages.
Not everyone who pays corp tax pays capital gains.
And not all of corporation profits goes to shareholders. So abolishing it would create a major deficit. Wallstreet has like 2 trillion in savings, we need ideas to encourage than money to be invested
Also a 0 corporation tax encourages more legal tax evasion as people incorporate themselves leading to more defcit.
Best thing to do is cut overseas spending and farm subsidies .
I don't think this is right. The only "people" who actually pay the corporate tax are the corporate entities.
Of course corporate revenues do not exclusively flow to shareholders. Some revenue pays the corporation's own employees. Some is used for expansion. Some is saved (look at the balance sheets of tech companies). But with the exception of a few companies (Apple, Microsoft, Google), that money is generally spent somewhere.
The cash hoarding seen on Wall Street has little to do with the corporate tax rate, and more to do with a severe reluctance to lend. The marginal profit of lending that money out is not worth the marginal risk. No bank wants a lot of loans outstanding if we go into a double dip.
As for the tax evasion aspect, it works more like a tax deferral. Since your money would be trapped in a corporate entity, it would have to be used for business purposes...while this is ripe for abuse, the government already addressed it via a personal holding company tax, back when the top bracket was 70%+.
I agree with cutting farm subsidies and overseas spending.
But cutting the corporate tax rate just makes sense. It would cost the government some revenue. But much less than one might think. Companies could repatriate profits. The US would attract more commerce. The increase in investment and economic activity would likely largely offset the cost of the tax cut.
I was referring to overseas investors, who I dont think pay cgt.
Corporations buy assets like offices, entertaining clientd etc so I think its fair they pay a tax on that income. The most shareholders recieve is like 6% of annual profit.
Wasnt there a scheme a few years ago where corporations could repatriate profits if they invested some of it, I think it was seen as a raw deal for tax payers
I am not an accounting expert, but if you incorporate your income I think you can make tax free loans to your self, wait for inflation to wipe the value out and then repay the loans like later. Im sure other methods exist.
I agree with cutting corparation tax on a trial basis and see if there is any increase in evasion. The big companies like google only pay like 2% so would not expect them to announce any new investments because of a tax cut.
While getting rid of corporate taxes make sense, it is infeasible. People are not smart enough to understand how businesses pass through costs. Companies are seen as evil ogres that horde wealth in a castle and don't give it to the little people, instead of a collection of shareholders who provide capital to the company and deserve a return.
I actually enjoy the fact that corporate taxes are simply passed through. It is a tax on the stupidity of Americans who cannot understand a relatively simply idea.
I've stopped reading anything editorial in nature from bloomberg, they are moving farther left
yes
Intellectually, I think this is a valid idea. I'd be concerned it would encourage companies to stop paying dividends, but I doubt that would have much effect in reality. If you can a) encourage the on-shoring of capital b) reduce wasted energy spent on tax minimisation c) encourage business to come to America, I'm in favour.
Corporations are people. I think it'd actually be fascinating to see corporate tax rates litigated as unequal taxation.
I would pay to see that trial. Somebody must have tried this already...
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