Why not just scrap all corporate taxes?

Both major-party presidential candidates claim to have tax plans that will help make the economy work for everyone. They will assist the anxious middle class, the downsized and the dispossessed while growing the economy and jobs. An important component of each is the treatment of corporate profits.

The candidates differ on how to reform the corporate tax code. Front-runner Hillary Clinton has not embraced President Barrack Obama’s proposal to reduce the federal corporate marginal tax rate to 28 percent from 35 percent, the highest in the developed world, and pair the reduction with a broader tax base (fewer exemptions) to generate savings to finance the proposed cut. Instead, Clinton has proposed tighter rules to deter corporations from moving abroad and measures to prevent corporate tax avoidance.

Donald Trump, on the other hand, favors a 15 percent corporate income tax rate and would offer corporations a reduced 10 percent rate if they bring home some of the $2 trillion American corporations have stashed overseas.

But the best path might just be to scrap the corporate tax altogether.

Neither candidate has addressed the issue of most high-income countries having adopted a territorial tax system, in which income earned abroad is not taxed by the home country. Yet the U.S. continues to use a version of a global tax system that taxes domestic companies’  income regardless of where it was earned.

The case for lowering the tax rate is that the gap between the U.S. rate and that of other countries encourages companies to shift investment and profits overseas. Corporations complain that high corporate taxes and a global tax system make it more difficult for them to compete in the world economy, attract foreign investment to the U.S. and create American jobs.

The American public is greatly unimpressed by these arguments. Polls show that the majority of Americans believe corporations pay less than their fair share in taxes. According to a survey by Citizens for Tax Justice, many Fortune 500 companies paid an average effective federal tax rate of just  19.4 percent, much less than the 35 percent marginal rate, the additional tax paid on an extra dollar of income.

A key target of public criticism is the expansion of deductions and exemptions to corporate income that have contributed to its decline as a share of total tax revenue over the last several decades. Corporate income taxes accounted for 32 percent of federal tax income in 1951; by 2015 it was 11 percent.

The U.S. has a dysfunctional and confusing tax code. Lost between fact and fiction is the question who bears the economic burden of taxing  corporate profits. You don’t have to be drunk, crazy or both to understand that this is a nontrivial question.

Are corporate taxes simply another way to tax firms’ shareholders, employees, and customers? When corporate income is paid out as dividends or realized as capital gains, corporations and shareholders pay tax twice on the same income. Are these the only people who actually end up paying the corporate income tax, or do employees also pay in the form of lower wages and fewer benefits?

If that is indeed the case, then perhaps it is time to scrap the corporate income tax altogether and instead tax individuals on their dividends and capital gains at ordinary income tax rates. The corporate income tax would go the way of Prohibition, and in the process make the U.S. a desirable place to locate and build businesses.

This certainly isn’t the last word on the subject, but it isn’t a bad approach to reforming the corporate tax code, which will likely be addressed after the 2016 elections if one party controls the White House and Congress . If not, we’ll just continue to improvise- and likely produce the same dysfunctional results.

Originally Published: Aug 23, 2016

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