John Brian Fast, CPA

Ultimately, the owners of corporations have to pay taxes on the dividends they receive.  That sounds like double taxation to us.  So why don’t we correct this? 

Surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all, the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America’s global competitiveness, and raise future wages.

The Canadian economy boomed after they lowered business taxes.

The US has the second-highest corporate income tax rate of any advanced economy (39% including state taxes).  Many major competitors, Germany and Canada among them, have reduced their corporate tax rate, making American companies less competitive globally.

So why don’t we fix this?

Various credits and deductions, depreciation, interest and other credits reduce the effective corporate tax rate. But netting everything, our corporate tax severely retards and misaligns investment.  This competitive disadvantage becomes more obvious as more and more capital becomes internationally mobile in this globally connected world.

Corporate income is taxed a second time at the personal level as dividends.  Capital gains on the sale of stock are also taxed.  With new taxes in the health reform law and the expiration of the Bush tax cuts, total corporate taxes are going to go up, NOT down.

So why don’t we change this?

The OECD has OCD about lowering taxes on small business.

There is considerable evidence that high corporate taxes are economically dangerous. In a 2008 working paper entitled “Taxation and Economic Growth,” the Organization for Economic Cooperation and Development (OECD) concluded that “Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes.”

Every major tax reform proposal in recent decades has centered on lowering taxes on capital income and moving toward a broad-based, low-rate tax on consumption. This could be accomplished by junking the separate corporate income tax, integrating it with the personal income tax (e.g., attributing corporate income and taxes to shareholders or eliminating personal taxes on corporate distributions), and/or allowing an immediate tax deduction (expensing) for investment (which cancels the tax at the margin on new investment and hence is the priority of most economists). The Hall-Rabushka Flat Tax, the Bradford progressive consumption tax, a value-added Tax (VAT), the FairTax retail sales tax, four decades of Treasury proposals and the 2005 President’s Tax Commission proposals would all move in this direction.

Reducing or eliminating the negative effects of the corporate tax on investment would increase real GDP and future wages significantly.  Reducing taxes on new investment could help strengthen what is a historically slow recovery from such a deep recession. It would also strengthen the economy long-term. American workers would benefit from more jobs in the short run and higher wages in the long run.

So why don’t we move in this direction?

It moves slow but ineffectively.

The answer is:  Our Congress long ago lost the ability to respond quickly to enact economically healthy legislation.  Our system of government is broken.  We need to fix it first before we can hope to fix our tax structure.