Time to End Wasteful Corporate Tax

Published June 7, 2011

If the currently gridlocked Congress makes any major, permanent changes to U.S. law before the 2012 elections, it will probably be in the realm of corporate tax reform. After all, the United States has the highest statutory corporate tax rates of the major developed countries, requires all but the smallest businesses to do vast amounts of paperwork to figure out what they owe, and causes so many problems for business that the White House and Congressional Republicans actually agree some sort of reform makes sense.

If any consensus on policy moves emerges, it’s almost sure to be better than the current system. (Little could be worse.) That said, the current debate over the corporate tax code is far too timid: The corporate income tax should be done away with altogether. Abolishing the tax would remove a huge economic drag, should appeal to those on the Left as well as the Right, and wouldn’t necessarily increase the budget deficit.

The economic benefits would be both immediate and lasting. Eliminating all corporate income taxes would cause massive amounts of wealth and millions of new jobs — literally — To flow into the country as businesses from all over the world flocked to our shores. Corporate income taxes are almost certainly among the least-efficient taxes because they can almost always be shifted to someone else or somewhere else. Large, sophisticated global enterprises can always minimize their tax liability by taking advantage of international tax competition or moving key operations to another jurisdiction.

That’s not a bad thing–different jurisdictions have a right to have differing tax rates–but it does mean the biggest companies will almost always be able to avoid taxes they really don’t want to pay. That’s why so-called “tax havens” exist. Why not invite ourselves to the low-tax party?

Moreover, businesses will always try to shift taxes to someone else. Those with a lot of market power (such as a monopoly water utility) will simply pass them directly on to their consumers, while those in hypercompetitive markets (such as clothing retail) may end up reducing their profit margins and forcing their stockholders to pay the taxes. Others will cut employee compensation (possibly the most common response), negotiate harder with suppliers, or cut capital investment. But in the end, some person somewhere — a customer, vendor, stockholder, or employee – ends up paying any tax supposedly imposed on a corporation. And the people who truly end up paying a given corporate tax will be selected in ways that don’t fit either liberal or conservative ideas of a good tax system.

While the conservative appeal of corporate tax elimination ought to be obvious, in getting government out of the way of free enterprise, liberals have just as much reason to support it. In fact, the most prominent proponent of corporate tax elimination is the decidedly left-wing former Clinton administration Labor Secretary Robert Reich. Any corporate income tax is likely to be regressive because small businesses have to pay whatever the government decides while big ones can find or lobby their way to loopholes. Those who believe in progressive taxation should hate the corporate tax. The tax also gives corporations a big reason to play politics.

Finally, there’s no reason why eliminating the corporate income tax should increase the budget deficit. Some of the money not taken from corporate treasuries would be paid as personal income and taxed that way, while economic growth stimulated by elimination of the corporate tax would increase other tax revenues. Other taxes, it’s true, would likely have to go up as well if the corporate tax were eliminated but, on balance, the economic benefits of eliminating it outweigh the harm of most other tax increases.

Any corporate tax reform would be a good start. The endgame, however, shouldn’t be reform of the corporate income tax — it should be outright elimination.

Eli Lehrer ([email protected]) is vice president of The Heartland Institute, director of its Washington, DC, office, and director of its Center on Finance, Insurance, and Real Estate.