Megan McArdle at Bloomberg View has a terrific article today arguing that the corporate income tax should be abolished. She points out that it has become “a sort of long chess match.” The government makes a move and the armies of tax lawyers and accountants make a countermove. This has consequences:
Every new law has possible intersections with every other tax law in existence. As the number of laws grows, the number of possible intersections grows even faster. And each of those intersections represents both a possible way to avoid taxes and a potential for unintended consequences that inadvertently outlaw something Congress never intended to touch. This growing complexity makes it more and more difficult for either companies or lawmakers to forecast the ultimate effects of new tax laws. That’s bad. It’s also expensive.
There’s a perfect example of this blobification of the tax code with the personal income tax. The 1913 original was all of 14 pages long. But the 1942 Revenue Act, which brought the income tax to the middle class to help finance World War II, was 15 times as long at 208 pages. But of those 208 pages fully 162 dealt with closing, or defining, loopholes uncovered by tax lawyers in earlier revenue bills.
And while people are all more or less alike except for the size of their incomes, different industries can be very different indeed. For instance, there are,
tech firms whose only assets are a few computers and a handful of programmers to airlines and aluminum mills that run huge workforces and buy lots of heavy equipment meant to last decades. If you ignore expenses and just tax revenue, you’ll either end up giving the tech firms a hell of a deal or handing low-margin businesses such as grocery stores a tax bill for 800 percent of their profits.
Megan points out that abolishing the corporate income tax would bring howls of protest from the left that corporations aren’t paying “their fair share.” But corporations, of course, don’t pay the corporate income tax. Instead it’s paid by some combination of workers, with lower wages; customers, with higher prices; and shareholders, with lower profits. The particular combination depends on the economic circumstances of each industry. And abolishing the corporate income tax (which was, anyway, only intended to be a stopgap until a personal income tax amendment could be ratified) would have many extremely positive effects for the American economy.
- It would then be fair to tax dividends as ordinary income, which they are not now. That means that rich stockholders would pay 39.6 percent on that income, not 20 percent as now.
- Corporations would repatriate trillions in profits now held overseas to avoid U.S. taxes and invest much of that money here.
- Foreign corporations would flock to the United States instead of U.S. corporations moving their headquarters overseas.
- Corporations would concentrate on pre-tax income, which is a function of economic success in the marketplace, not after-tax income, which is a function of lobbying success in Washington.
- Tens of thousands of tax lawyers, accountants, lobbyists, and IRS agents would be out of work and would have to find something economically productive to do.
- Corporations would have much less interest in providing perks to their executives that the corporation can write off instead of taxable salaries.
- There would be a race among the 50 states to lower or abolish their own corporate tax rates.
In 2013, the corporate income tax brought in $274 billion, slightly less than 10 percent of total federal revenue. That would be a considerable hit on federal revenues, but the positive economic effects would quickly offset much of that loss. The long-term effect would be to increase federal revenues substantially. If there is to be a deficit, this would be a damn good reason for running one short-term.