Time to abolish corporate tax

Corporations should not pay tax. This may seem counter-intuitive, but is a very sensible policy. Corporate tax is inefficient, unjust, regressive and damaging to the economy. The principal reasons advocated for taxing corporations make no sense.

The first argument raised in favor of taxing corporations is one of justice. Surely corporations should be asked to bear their fair share of taxation. But this is ridiculous. A corporation is just a legal entity through which people cooperate. Money is always, ultimately, paid to people, and can be taxed then. To say that the business is paying taxes is like saying that your bank account pays taxes so you don’t have to. Businesses can only do one of two things with money: invest it, in which case taxing the money is unwise, or pay it to employees or shareholders, in which case it is income and is taxed as such.

Another suggestion is that taxing corporations is efficient. Like Willie Sutton, governments tax business “because that’s where the money is”. This may have made sense when only a few citizens paid income tax. Now it is demonstrably not true. Corporate tax yields vary with the economy, but bounce in the one to three percent of GDP range. Far from being efficient, it requires an entire additional structure of tax collection, duplicating the one for collecting personal income taxes. If the money was collected when paid to individuals this bureaucracy could be cut.

And corporate tax is a form of double taxation. The corporation pays tax, then dividends are paid to shareholders out of post-tax income, which is then taxed again as income to the shareholders.

But isn’t that fair? Doesn’t this double taxation fall mostly on the wealthy? Some of it certainly does, but not all. Some profits are returned to small shareholders – seniors with small investments, for example, who may not earn enough to have to pay income tax. Why should money be deducted from them at the same rate as from millionaires like Mitt Romney and Barack Obama? If the money now collected as tax was paid to shareholders, those with high taxable income would have to pay more than those with a lower income. If it is social justice you are seeking, that would seem to be a better system.

Corporate tax does not put a heavier burden on the wealthy, but a heavier burden on those who earn their money by investing in business, whether they are wealthy or not. This type of discrimination by source of income is very damaging, and penalizes very desirable behavior – investing.

To avoid tax liability, corporations spend money. They invest inefficiently, sometimes buying suppliers or competitors, when it would be in the interests of the wider economy to keep markets more competitive. It encourages spending by the tax deadline rather than fruitful investment.

The effective average corporate tax rate is very low. Allowing business to pay more to shareholders and taxing it as income might raise more revenue. It is hard to say for certain, but no change is likely to be substantial, simply because the total presently raised from corporate tax is low. Encouraging better investment and creating clearer incentives would probably boost economic growth.

In the interests of economic efficiency and social justice, this tax has to go.


Quentin Langley is a Senior Lecturer in Marketing at the University of Bedfordshire Business School as well as a freelance columnist published in the UK and all parts of the US. He blogs on social media and crisis communications at brandjacknews.com

Comments

  1. Well said airport taxes are tlroouughhy confusing. Most of the time flight tickets don’t even mention whether they’re included, and airports worldwide change departure taxes regularly as a travel agent it’s impossible to keep up to date.

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