The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)

August 14, 2008

The correct corporate tax rate

National Democrats are in high dudgeon over a General Accounting Office report that two-thirds of U.S. corporations do not pay income taxes — that is, do not have income tax liability at the end of their fiscal year.

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” harrumphed U.S. Sen. Byron Dorgan (D–North Dakota), who requested the GAO report with U.S. Sen. Carl Levin (D–Michigan), who you might think has better things to worry about, such as the deteriorating state of the state he represents. “The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls.”

Well, there’s (at least) one problem with Dorgan’s spleen-venting. As page 13 of the report points out:

… The overwhelming majority, about 79 to 80 percent of both large [foreign-controlled corporations] and [U.S.-controlled corporations] that reported zero tax liability in 2005, established it on line 28 where they reported zero taxable income before net operating losses. This means that their reported current-year deductions more than offset the positive current-year total income reported on line 11.
In other words, in order to pay income tax, corporations have to have net income, as defined by federal tax law. Dorgan therefore is venting about the wrong thing — instead of venting about companies paying no taxes, perhaps he should be bold enough to support, instead of a corporate income tax, a corporate gross receipts tax, where taxes are based on revenue, not income (revenue minus expenses). Dorgan then will have to explain why it will be a good thing when corporations reduce employment and R&D spending, dividends to shareholders (which, by the way, comprise half of Americans), and such niceties as donations to nonprofits once they have tax liability they don’t currently have.

The dudgeon fades further when you read this from the Associated Press:

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called “S” corporations pay taxes under individual tax codes.

“Half of all business income in the United States now ends up going through the individual tax code,” Edwards said.

The fact is that, contrary to what Dorgan thinks, no business escapes from taxes. Every employee, including those allegedly excessively paid CEOs, pays income taxes, Social Security taxes, capital gains taxes if they own stock, state and local sales taxes, and so on. Corporations also pay taxes covering their share of the Social Security taxes of their employees, unemployment and Worker Compensation taxes, property taxes on their properties and sales taxes (to excess, in many cases) on business-related items that aren’t exempt from the sales tax. The only way a corporation can escape taxes is to have no employees, facilities, equipment or purchases.

I’m going to
repeat myself and point out that businesses should not have to pay taxes other than what funds strictly property-based services. In addition to the savings for companies in the cost of complying with our tax system, the savings from not paying corporate income or personal property taxes could go in one or more of three directions — more investment in the company, more pay for employees, or more dividends for shareholders. Any combination of those three is preferable to giving state government and our elected officials, including Dorgan, more money to waste. The benefits any business provides the areas they’re in, beginning with providing jobs, far exceeds whatever taxes a company pays. And every dollar a business is taxed is one more dollar in the price of a product, one less dollar that can be spent on the company (including employee pay), or one less dollar that can be passed on to shareholders.

I’ve also said this before, but it too bears repeating:
In addition to ferreting out hidden taxes — since, as we all know, businesses don’t pay taxes, they pass them on to customers or their shareholders — ending corporate taxes other than strictly property-based services would have the additional effect of removing a lot of money and lobbying from our political system. If you have no corporate taxes, you have no corporate tax breaks, you have no lobbying for tax breaks, and you have no contributions to political candidates business hopes will favor tax breaks. (Then again, that’s probably a big reason why Dorgan and Levin wouldn’t favor ending corporate taxes.)

What’s the correct corporate tax rate? Zero.


Cindy Kilkenny said...

Thanks for this!

Jack Lohman said...

Corporate taxes should be zero, at least for those whose CEOs are paid no more than 100 times their lowest paid workers and they don't offshore their manufacturing.

As it is, they just pass their taxes on to consumers anyway, so what have we gained? Except for even more regressive taxes.

Let's use tax policy to encourage good corporate citizenship and make our products more competitive than imports. An then let's make our taxes on income (all income) even more progressive than they are.

Jack Lohman