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. https://www.forbes.com/sites/johngoodman/2021/04/02/who-pays-the-corporate-income-tax/?sh=4eb92e9b58ab

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”

Our Social Safety Net

Virtually every country provides assistance to their poorest citizens–to those who fall for one reason or another from normal employment. Approaches to fulfill this objective differ widely. The Federal safety net spending in in the United States in 2019 was 2,600 billion dollars. Total government (Federal, State, and local) entitlement spending was 2,900 billion dollars. Of this, about one third was for Social Security and one third for Medicare and Medicaid.

“The federal government funds 126 separate programs targeted towards low‐​income people, 72 of which provide either cash or in‐​kind benefits to individuals. (The rest fund community‐​wide programs for low‐​income neighborhoods, with no direct benefits to individuals.) State and local governments operate more welfare programs.”[1] This year, in response to the Covid-19 pandemic, the Federal Government has added about $3 trillion dollars ($3,000,000,000,000) for temporary one-time assistance for the impact of the forced interruption of production, and is likely to add more.

The goal of these programs is, or should be, to adequately support those needing it without creating disincentives to work and with minimal abuse (corruption). The CARES Act and other pandemic assistance programs were quickly created in an emergency. It is thus understandable that mistakes were made. As time goes on charges of corruption (politically motivated expenditures) are multiplying. The administrative challenges of suddenly making millions of individual payments quickly and correctly were and are huge.

There is a dramatically better way to do this. We might characterize our existing approach of government directed assistance (e.g. food stamps) as the Socialist Model. It is top down and dictates how the assistance is to be used. Replacing all of these programs with a Universal Basic Income (UBI) leaves the decisions on how its recipients use it with each individual. This might be characterized as the Individualist Model. It has many advantages over our existing approach.

A UBI would eliminate all government discretion over who receives assistance and how much they receive.  Every adult citizen would receive that same amount monthly (and every legal child would receive the same smaller amount). The government could not favor one group over another on any bases other than age. This removes political considerations from defining and administering the payments. Every birth and death in the country is recorded in a county hall of records and every legal immigration is recorded with the United States Citizenship and Immigration Service (USCIS). Thus, the records upon which payments would be based already exist. Using them would remove my need every year to submit a certified document to my pension plan stating that I am still alive. No special measures or supplements would have been needed to address the personal income shocks of covid-19.

One carveout would be required for medical insurance. Every person or family should be required to use part of its monthly UBI to buy a health insurance policy that at a minimum includes catastrophic care coverage. At the launch of UBI and this insurance mandate, insurers would not be allowed to refuse coverage to people with preexisting conditions and the government would cover the actuarial estimate of the extra cost of such conditions.

As the UBI would replace Social Security pensions, another modification would be for the unlikely case that the UBI would be less than ones current Social Security pension (which in 2017 was $13,824 for someone who retired at age 65). So, for such a person who has already retired or is, say, within five years of retirement, their UBI should not be less than their existing Social Security pension. But a UBI of $1,500 per month ($18,000 per annum) for everyone seems reasonable, which would make this case mute.

Those with a welfare state mentality argue that people can’t be trusted to spend such income wisely (from their perspective). I reject such thinking. There are among us, of course, those individuals with addictions and mental illnesses who are indeed not capable of making their own decisions and thus caring for themselves. Our laws and practices already provide for such special cases and would continue to supersede the rights of such individuals to make their own decisions about the uses of their UBIs.

But can we afford it? Today’s American population is about 330 million, of which about 80 million are under the age of 20. To get a rough sense of what is possible, if we replaced today’s safety net expenditures of 2.9 trillion with a UBI to the 33% poorest (110 million people, of whom 25% or 26 million are under 20 years old) in the U.S. in 2019 each person could received about $26,000 per year or about $2,200 per month. If children (those under 20) are paid half what is paid to adults, existing safety net expenditures could finance about $15,000 per child per year and $30,000 per adult if a UBI is given to the lowest third of the population in terms of income. For a family of four this would be an annual income of $90,000, which is above the median household income of about $64,000 in 2019, and is clearly excessive.

But a UBI must be universal. It must be paid to everyone for several simple reasons. Most importantly, it would eliminate the disincentive to work in the existing programs, which end if a person’s income rises above a specified level. With a UBI, every additional dollar of income joins an irreducible UBI. Every additional dollar earned make the recipient that much better off (the UBI amount plus the earned income). This is a very important feature. In addition, it would remove any political question over the level of income at which it should be withdrawn. It would be paid to everyone regardless of their income.

But paying the UBI to everyone, not just the lowest one third, would triple its cost. Can we afford it? Clearly those who pay taxes will have to pay more to cover this additional cost. But as the additional cost is to cover payments to these taxpayers, they would not pay more on net (depending on the nature and structure of our tax systems).  For reasons of equity and tax efficiency I have long advocated a flat tax, meaning the same marginal tax rate for everyone paying taxes. “My-political-platform-for-the-nation-2017” I would go even further and replace income taxation (both corporate and personal) with a flat rate, comprehensive consumption tax.  When a flat rate tax, whether income or consumption, is combined with a UBI, the net result is mildly progressive. Low income people pay no tax on net and in fact receive net income via the UBI (what Milton Friedman called a negative income tax). Middle income families might break even (receive a UBI sufficient to pay for their extra taxes) and for higher income families their extra taxes would be greater than their UBI, hence a progressive average tax rate system even with flat marginal rates.

A UBI with a flat rate consumption tax would enormously simplify our tax and welfare system while improving the financial incentives to work and returning more control over our lives to individuals from the state. Covid-19 dramatically demonstrates that the time has come to replace existing welfare systems with a Universal Basic Income (UBI).


[1] Michael Tanner, “When Welfare Pays Better than Work” CATO Institute, August 19, 2013.

Tax reform and the press

I have written several articles about the need for serious tax reform in the U.S. and set out the basic principles of good tax law accepted by most economists. “US Federal Tax Policy”, Cayman Financial Review, Issue 16, Third Quarter 2009. https://works.bepress.com/warren_coats/47/  Cayman Financial Review, July 2013

Taxing consumption is best, but if income is taxed, it should be broadly defined and taxed uniformly. Income tax reform should follow the mantra “broaden the base and lower the rate” for the revenue needed to finance whatever the government spends. The main dispute tends to focus on whether and how progressive the tax rate should be. I favor a flat rate as the fairest and simplest regime. This means that a person with twice the taxable income would pay twice the tax. Many others favor a progressive rate—a marginal tax rate that increases with income—, which means that someone with twice the taxable income might pay 3 or 4 times as much in taxes. In 2016 the “top 1%” by income paid over 50% of all federal income tax revenue collected and the top 20% paid 84%.

I raise this issue because any judgment of whether a reduction of the top U.S. marginal tax rate from its current 39.6% to 38.5%, as currently proposed by the U.S. Senate, increases or decreases the fairness of the system depends on whether you consider 39.6% fair or too high or too low. I consider it too high and a reduction to 38.5% too little, so I would say that the tax reform is unfair to the top income groups by not lowering the top tax rate enough. The press almost uniformly refers to any cut in the top rate as favoring the rich (rather than reducing discrimination against the rich).

But what prompted this note was the blatant bias reflected in the following Washington Post article that claims to report the winners and losers in the current Senate tax reform proposals. Winners-and-losers-in-the-Senate-GOP-tax-plan   In the losers column the article states the following for the poor:

“The poor. More than 70 million Americans don’t make enough money to have to pay federal income taxes. Many of those people currently receive money back from the government because they qualify for refundable credits. Under the Senate plan, those credits aren’t going away, but they also aren’t growing. On top of that, the plan raises America’s debt, which will likely require cost cuts somewhere down the line. Republicans have proposed sizable cuts in the past to some safety net programs used by the poor.”

According to the author of the article, Heather Long, the poor lose because they don’t gain anything!!! Seventy million of them don’t pay taxes to begin with so there is not much that tax reform can do to lower their taxes. The existing tax credit paid to these people will remain but is not increased. Thus Heather concludes that the poor are losers because they didn’t gain anything. I agree with Heather’s implicit objection to the plan’s increasing the federal government’s debt, but avoiding that would require higher taxes for someone and has nothing to do with making the poor worse off that I can see.

Any tax reform that is revenue neutral (unfortunately this one will increase the debt by 1.5 trillion dollars over ten years.) necessarily increases taxes for some while lowering them for others.  It should not be judged by whether it will result in President Trump paying more taxes or less, as some press would have it.  It should be judged by whether the resulting realignment of tax obligations is fairer and economically more efficient (neutral). Sadly it is rarely discussed in these terms.