Several large U.S. corporations have recently announced that they are planning to move their headquarters to a low tax company such as Ireland or Great Britain, in order to reduce the high corporate taxes which they now have to pay. Many observers agree that the best way to address this problem is to lower the corporate tax rate down to an internationally competitive rate of about 20% to 25%. Such a rate cut would be paid for by closing the loopholes and deductions which many corporations now enjoy.
The Business Insider reporter, Danny Vinik, makes a very good argument for going further and completely eliminating the corporate income tax for the following reasons:
- Corporate taxes don’t collect that much revenue. As shown above the revenue from this tax has dropped to about 2% of GDP which is about $300 billion at the present time. This is roughly 10% of total annual federal tax revenue.
- Tax capital gains and dividends at the same rate as earned income. This would make up for the lost revenue and is justified because there would no longer be double taxation of corporate earnings.
- The corporate tax is not progressive. It is now paid for by both workers (with lower wages) and shareholders. Eliminating this tax (and replacing it with higher taxes on dividends and capital gains) makes the tax more progressive.
- Corporations waste huge amounts of money trying to reduce their tax bill. What they now spend on tax lawyers and lobbyists could be put to more productive use.
- The current system disadvantages new businesses. It’s the old firms which have collected all the deductions. New firms start out paying the full 35% rate which puts them at a large competitive disadvantage.
- It will make our financial system safer. Since debt payments are tax deductible and equity financing is not, debt financing is currently incentivized. The elimination of the corporate tax would end this preference of debt over equity.
Taking this action would not only have all of these benefits, it would make the U.S. the most desirable place in the world to locate a business. We would experience a huge economic boom, creating millions of new jobs. It would end our present economic funk and put us back on a rapid growth trajectory. What are we waiting for!
I suggest you read NYT article by Andrew Ross Sorkin,
Corporate taxes not really so burdensome after all?
He quotes Edward D. Kleinbard who contends that U.S. multinational companies don’t pay anywhere near 35 percent. Companies paid, on average, 12.6 percent, according to the Government Accountability Office.
Thanks for your comment. But Mr. Kleinbard also says that:
“Thus fundamental corporate tax reform is urgently needed, but the path forward has two prongs. First, Congress should enact a temporary law to preserve the status quo, and thereby the corporate tax base, by treating inversions according to their economic substance, and by foreclosing the “hopscotch” strategies described above. Without this, there will be no corporate tax base left to reform.
Then both parties need to get serious about substantive reform, lowering the rate to say, 25%, and imposing a stable international regime that works well with territorial systems in other countries. The work Congress’s tax-writing committees did last year shows that reform is possible. Now congressional leadership needs to make it a priority.”
There are many different routes to reform. The important thing is to get moving on a solution.