Why Taxing Corporations Is Dumb - OZY | A Modern Media Company

Why Taxing Corporations Is Dumb

Why Taxing Corporations Is Dumb

By Steven Butler



Getting tax policy right can create jobs and boost the economy, even if the symbolism looks wrong.

By Steven Butler

Corporations may be people, as Mitt Romney and the Supreme Court say, but most of them aren’t exactly lovable. And if all of these unlovable entities really want to be treated like people, shouldn’t we tax them like the rest of us and make them pay their fair share?

Well, maybe it seems fair in principle, but that doesn’t mean it’s smart, or good, tax policy. In fact, taxing corporations is one of the dumbest, most self-defeating tax policies on the books, and there’s plenty of competition for that title. To boot, the result is decidedly unfair.

Here are a few facts: The U.S. corporate tax rate once profits exceed $18.3 million is 35 percent, the highest in the world — “out of whack,” says Dan Mitchell, senior fellow at the Cato Institute. For corporations earning less than that, it’s generally less, starting at 15 percent. That’s the percentage that corporations are supposed to pay on their profits.

Sure, some companies have ways to limit this burden by parking operations or assets overseas — and they have gotten some bad press for doing so. But not all corporations can afford the tricky bookkeeping of subsidiaries, inversions and other tax-avoidance strategies. So it’s small companies that pay up. For corporations with less than $10 million in sales, the cost of complying with the tax regime is 67 percent higher than for large corporations. If you’re a company that passes profits and losses directly to shareholders, tax rates can be twice the average. Is that fair?

Most economists agree this is really hurting workers rather than owners of capital.

Lawrence Kotlikoff, economist at Boston University

Of course some companies do, in effect, access the money at home without paying the tax. To pay a shareholder dividend two years ago, Apple borrowed $17 billion rather than bring home the billions it has stashed overseas, for which it would have to pay tax. But why should companies have to perform such gymnastics? If corporations could just invest at home without worrying about the tax bite — and if they had no tax incentive to invest overseas — a lot more money would be invested in the U.S. 

Right now, corporate taxes account for about 10 percent of the total tax take, at $273.5 billion in 2013. Lawrence Kotlikoff, an economist at Boston University, calculates that eliminating the corporate tax, while raising income or consumption taxes to compensate, would produce a dramatic growth spurt in the U.S. It would increase investment, permanently raise wages by 12 to 13 percent and boost gross domestic product by 8 to 10 percent. Eventually, the growth alone would be enough to make up for the lost tax revenue. “Most economists agree this is really hurting workers rather than owners of capital,” says Kotlikoff.

A halfway solution that might be more politically acceptable would be to slash the 35 percent rate, with less dramatic impact. But why not just eliminate the tax, make life really simple and stop paying all those accountants and financial engineers? This would be good for workers; investors still make money; and government revenue doesn’t suffer. It’s simple math.

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