Let's Eliminate the Corporate Tax

Article: Wall Street Journal, A Short History of the Income Tax, John Steele Gordon

Lately there has been a lot of talk about corporations who do not pay their fair share of tax, big oil getting all matter of tax-based subsidies, General Electric  paying an effective tax rate of 0% last year, etc.

When Democrats go after millionaires and billionaires, corporate jet owners and the like, and ask them to pay their fair share, I'm all for it.  The gap between rich and poor in this country is greater than it's ever been, and rich folks have been making a sport out of hiring talented tax advisers to game our country's Byzantine tax code for decades.

But when it comes to bashing corporations, and asking them to pay more, I have mixed emotions.  Corporations are not people.  But they do hire people.  They pay wages, produce useful goods, add value and innovate.  And they are highly regulated--depending on the industry.

But the key fact is that corporations are owned by individuals, and individuals are taxed.  So why tax corporations as well as individuals?  In the interest of simplicity and fairness, lets' just stop taxing corporations.  Instead, let's impose a truly progressive tax on all individual earnings--including on the money that people earn from their corporate investments.    Then we could stop doing silly things like taxing capital gains and dividend income at a lower rate than ordinary income.   If we did this, Warren Buffet would be paying a higher tax rate than his secretary, and all would be right with the world.  And we would see a massive shrinkage in the the tax compliance industry--a wasteful drag on our nation's productivity.

Graphic from www.taxpolicycenter.org
Note the small portion of revenue that corporate tax actually comprises.....

Not only that, but we would see the U.S. become much more competitive as a location for corporate headquarters.  This could only be good for employment.

Mr. Steele's article notes that the Corporate Income Tax was instituted in the early 20th Century as a stop-gap measure.  Unfortunately, it was never phased out.  I hope that Mr. Obama will take up tax simplification, as he promised.  It is an issue with bi-partisan support, which can do the country a world of good.  And I hope he will give serious consideration to the simple but dramatic step of eliminating the corporate tax altogether.