The Corporate Income Tax

Should the U.S. Corporate Income Tax be increased from its current 21% (plus state corporate income taxes that average about 5%) back to 28%? No, it should be reduced to zero. The corporate income tax should be abolished. Only people pay taxes, either workers from their wages, consumers in the prices they pay goods and services, or shareholders from their business incomes. The corporate income tax, taxes these people twice.  So who really pays a corporate income tax?

One of the standards applied by economists for a “good” tax is that it does not distort the allocation of resources. If tax treatment encourages investments that are less productive than otherwise, output will be lower, and we will be poorer. This is called the tax neutrality principle. “Next up: tax-reform”  The corporate income tax violates this principle because it taxes the same income twice contributing to a bias toward debt rather than equity financing. The activities of corporations generate wage income to its workers, which is taxed as income of its workers. Their purchases of supplies and services from other companies generate income for those companies, which are taxed there. The difference between a corporation’s revenue on its sales and these expenditures–its profit–is paid to its owners (shareholders) and is taxed as part of their incomes.

But corporate income is taxed again in the name of the company itself–double taxation. That tax must come from some combination of reduced employee remuneration (wages and benefits) and shareholder income.  Studies indicate that it comes largely from reduced wages.

Another problem with this double tax on corporate income is that many corporations operate in many countries. It is not easy (if even possible) to agree with each of these countries, which have their own tax policies, which income to tax in which country. Companies have become expert at shifting their activities and attributing income to the lowest tax jurisdictions.  Where, for example, is the intellectual property, which can be an important source of company’s income, owned for tax purposes? The answer is often Ireland.

Economists agree that the most neutral tax is a flat rate consumption (sales) tax.  “The Principles of Tax Reform” Consumption would be taxed were it takes place thus avoiding the issues in current income taxes of where the income is produced. In our global, internet linked world, the applicable consumption tax would be the one levied on the residence of the consumer as it finances the government services provided there.

In an earlier note on a Universal Basic Income, I presented back-of-the-envelop estimates of the consumption tax rate required to finance a UBI of 18,000 dollars per year for each and every adult and half of that amount for children (under 20 years old) if we abolish all income taxes (individual and corporate) and replace existing entitlement programs (Social Security, Medicare, Medicaid, food stamps, unemployment insurance, etc.) with that UBI. The combination of a flat rate consumption tax and a UBI produces an interesting degree of tax progressivity relative to income. I hope that you find it interesting. “Replacing Social Security with a universal basic income”

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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2 Responses to The Corporate Income Tax

  1. Jim Roumasset says:

    Not only do workers pay a large fraction of the corporate tax burden, but its economic burden (how much the economy shrinks) is larger than for, say, the income tax. Kotlikoff’s finding is telling. If the U.S. corporate income tax were abolished and the revenue made up by taxing wages, workers would be much better off (mainly because of increased investment in the U.S.)!

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