Abolish Corporate Taxes

According to the federal General Accounting Office (GAO), 60 percent of U.S. companies did not pay corporate taxes between 1996 and 2000. Wasn’t that during a boom, you ask? Was that not the time during which government coffers should have swelled with the fruits of that juicy 33 percent corporate tax rate? It certainly should have been. Unfortunately, economics has once again shown that the incentives and rewards in the private sector are taking all the talented loophole-leapers away from the public sector, leaving public funding high and dry. Sen. John F. Kerry, D-Mass., said recently that he intended to get “tough” on corporate America—just like every previous Democratic nominee. But if the government has not yet worked out how to collect taxes from 60 percent of U.S. companies in the middle of an economic boom, then it is hard to imagine that the situation is going to improve anytime soon. A better option would be to give up: corporate taxes are remarkably inefficient, consistently failing to raise the revenues they should—and yet taking up enormous resources at the Internal Revenue Service. The United States would probably be much better off raising taxes which are equitable and easy to collect.

This is unlikely to happen. First of all, most people abhor the idea of removing taxes on corporations. After all, in the mind of anti-globalization leftists, they are the engine of all the world’s ills. Even Kerry seems somewhat muddled: in a comment in the Wall Street Journal a spokesperson for Kerry said he “wants to make America more fair, so that average Americans don’t have to pick up the tab for corporate-America profits.” What politicians fail to remember is that people own companies, and many of those people are pretty average and just happen to have a few pieces of Exxon in their 401K. Taxing corporations ultimately takes money away from these people. A more nuanced argument would propose that since rich people have more wealth in the form of stocks, then we should tax corporations for that reason alone. But taxing the rich is much easier and more effective if you tax people individually. By having corporate taxes we are allowing thousands and thousands of people, many of them more wealthy than average, to pool their efforts and talents in tax avoidance. As a result, the rates of corporate tax avoidance are far higher than they could ever be on a rigorously-enforced individual basis.

The problem largely rests in America’s indecision as to whether it wants to tax rich people as highly as other countries do. Some parts of the tax code, like the estate tax (or “death tax,” if you’re talking to a Republican) and corporate taxes, imply that Americans would, on the whole, like to tax the rich. Others, like the various incentives for saving and investment, inevitably favor those who can and do save—the wealthy. Some might argue that this is just a function of a two-party system where a tax code is written piecemeal, but history does not match the facts. Most of the incentives for saving and exceptions for capital gains were written into the tax code by the Clinton administration, which also raised the top marginal tax rate—at once decreasing and increasing the burden on the rich. If anything, it is the muddled policy-making of Democrats and Republicans who don’t have majorities in either the Senate or the House of Representatives.

The best thing any government could do would be to abolish corporate taxes, the failed savings incentives and capital gains exceptions of previous years and play it straight with the electorate. People should be taxed based upon their cash income, since that is ultimately what they use to make purchases. Then the government has to decide just which income groups are going to pay how much of the tab for keeping government services and infrastructure running. Tough decisions, to be sure, but ultimately this is something about which the electorate can make an informed decision rather than trying to see through the spin and obfuscation of the current debate.

Corporate taxes have been the least funny joke in the absurd tax code for some time now, and it is time for the laughing to stop. The United States spends an absurd amount on both ineffective spending and revenue-raising programs—and this is one of the worst, with well over half of firms taking the federal government for a ride. Instead of trying to beat corporations at their own game, the U.S. would be much better off going after the real target of corporate taxes. The wealthy tend to own more equity and should be taxed directly rather than through a corporate vehicle. Doing so might not be palatable to politicians who have used complex tax policy to mislead the public for some time, but this change would ultimately get to the heart of redistribution of wealth without the wasted time and hot air.

Alexander B.H. Turnbull ’05, a Crimson editor, is an applied mathematics and economics concentrator in Quincy House.