Kissing Away the Corporate Tax

by David

Kissing Away the Corporate Tax:

(Via Economix)

Their calculation — which is only rough because it assumes no change in the behavior of companies or their shareholders — suggests that raising the top tax on long-term capital gains to 28 percent and taxing dividends as ordinary income (which faced a top rate of 35 percent at the time of the study) would raise enough money to pay for a cut in the federal corporate tax rate from 35 to 26 percent.


Raises some interesting ideas.  The commentary in response to this column seems to overwhelmingly be biased in a way which suggests that the commentators are obsessed with distinguishing corporations from the individuals who own them, while the whole premise of the paper and calculation in the first place is that we are taxing corporations (and thereby, their owners) in an inefficient manner.

Taxing corporations taxes all the owners of the corporation in the same proportion as their ownership of the corporation — effectively a flat tax.  The paper suggests that by lowering the corporate tax and raising the tax on distributions to the corporate shareholders (ie. raising taxes on dividends and capital gains), the taxes will be collected by the personal income tax – which is vastly more progressive than the corporate tax.

What it seems to ignore is the fact that if the corporations are paying a lower tax rate and the recipients of distributions are paying a higher one, corporations have a huge incentive to retain their earnings even if they don’t have anything better to do with them than distribute them to the shareholders.

It seems to me that the compromise is to start with the article’s premise – lower corporate rates and higher rates on dividends — and then permit the corporations to *deduct* any (or at least some higher proportion) of the money they use to pay dividends.  Right now, corporations pay corporate taxes on any earnings they use to pay dividends, and then the shareholders pay individual income taxes again on those dividends.  That double-taxation is why we’ve lowered the tax rate on qualified dividends.  But it looks like we did it backwards.  Perhaps we should have left the tax rate on the individuals where they were and lowered or eliminated the tax at the corporate level.

The problem with this is politics.  Too many folks keep trying to vilify corporations, and pretend that corporations are so distinct from their owners that taxing corporations makes more sense than it really does.  Thus, any proposal to lower corporate rates becomes way too easy for the opposition to paint in a way that the public eats right up – as giving breaks to evil large corporations while hurting individuals – even though taxing corporations in inefficient ways hurts us *all* by putting a drag on the economy, slowing growth, spurring inefficient uses of capital (like Apple leaving money out of the country instead of bringing it home and investing it here), and generating lots of work for folks whose primary task is to mine those inefficiencies in the tax code rather than eliminating them and having those same smart people do something useful.