The U.S. Corporate income tax should be abolished
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Con's idea sounds plausible--after all, corporations just pass their taxes along to their customers, anyway, right? Not so fast. While tax reform is necessary, and the corporate tax (as most of the tax code) is far from ideal, exempting corporate income from taxation would be a bad idea for several reasons : 1. it would be regressive and unfair l(most shareholders have above average income, 2. lose revenue (I'll talk about Kansas a little later) , and 3. inefficient (provides an easy tax shelter).
Economists Joel Slemrod and Len Burman in their excellent book Taxes in America, make the case against abolition: If corporate tax were abolished then taxpayers could shift what is essentially labor income into the corporate sector and receive it free from tax --and worse, finance consumption via loans from their own corporations! Economists Alan Viard and Eric Toder, in their paper advocating replacement (but not abolition) of the corporate tax, make an important point in favor of the necessity of a corporate tax:
By taxing corporate retained earnings on which individual tax would be delayed or avoided, the
current corporate income tax serves a very important function as a backstop for the individual income
Slemrod and Burman's fear of massive revenue shifting from personal to business to avoid taxes is no longer a hypothetical. This blunder of exempting corporate income is actually taking place in Kansas. From Josh Barro, New York Times contributor:
Jim Dunning Jr., managing partner of Dunning & Associates C.P.A.s in Wichita, says he has seen a few clients change the way their businesses are incorporated to take advantage of the tax law. Many small firms are structured as S-corporations, and federal law requires an S-corporation"s owner-managers to pay themselves at least a "reasonable" salary. But by converting to a limited liability company, or L.L.C., owners can set their salaries to zero and take all of their income from the company as profits, thus avoiding any Kansas tax.
Not surprisingly, Kansas has had budget shortfalls ever since. For fiscal year 2014, which ended on June 30, the state collected $330 million less in taxes than it had forecast, and $700 million less than it had collected in the prior year. Currently, Kansas has been forced to drastically cut school funding and now their Governor is calling for a sales tax increase to make up the deficit. That's not an outcome anyone should want.
For a budget shortfall to hit the U.S. government at this time, when we already have a sizable debt, would be a disaster. Right now, the corporate tax collects about $300 billion a year, which comes out to 11% of the nation's revenue. Abolishing the tax, with no replacement, would mean large cuts to health care, military spending, infrastructure, Social Security, etc. For all its flaws, it cannot simply be abolished.
A better solution is simply integrating the corporate tax with a personal tax; i.e. taxing accrued capital gains and dividends on individual returns. It is however, regrettably, politically impossible to do this. That would be seen as a massive tax increase and demagogued to a certain defeat.
I have a question for my opponent: how do you propose to make up the lost revenue, or do you propose simply conceding the lost revenue and add $300 billion or so to the national debt?
For more on this idea, see Viard and Toder Major Surgery Needed:
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