Corporate Taxes and the Rich

 

I’m obviously not someone our political leaders are turning to for policy advice, but I’ve been thinking about tax policy and how it can be used to promote economic growth and thought I’d share some of my ideas on the topic. I’m writing from a progressive point of view but there’s a combination of conservative and liberal ideas here. There are two basic concepts I’m working at, removing unnecessary encumbrances from industry that inhibit growth, and making those who benefit the most from our capitalist system pay for its maintenance.

Possibly the most radical idea I’m suggesting is the elimination of corporate income tax. I know liberals like to rail against Amazon and other corporations not paying any taxes so they may not like the sound of this one, but there are several problems with this tax. Like the list of corporations not paying taxes shows, it’s difficult to tax all corporations fairly. There are so many variables that depending on the industry many businesses can avoid taxes by moving segments of their company overseas or taking advantage of other loopholes. We want to encourage companies to relocate to America, not to leave. The value of the tax loopholes that many corporations use is so great that many of them will spend nearly unlimited amounts of money to ensure they get their special provision inserted in the tax code. As a result, corporate taxes encourage corruption that is nearly impossible to fight.

American industry must compete in the global economy, but corporate taxes make our corporations less competitive and reduces economic growth. It’s to our advantage to have lean prosperous corporations that are the best in the world at what they do. Currently every corporation has armies of accountants and lawyers that spend their days trying to find ways to avoid paying taxes. This is an enormous waste of labor. There’s also the fact that corporate taxes are a form of double taxation since profits are paid to the shareholders in the form of dividends which are also taxed. Corporate taxes encourage corruption, are applied unevenly and stunt economic growth.

You might be wondering how will we fund all the things the government does if we eliminate this huge source of Federal revenue? First, corporate income tax actually doesn’t account for that much of the Federal budget, in 2018 it only accounted for 6% of Federal revenues. It seems corporations have been pretty effective at lobbying (bribing) Congress to put in enough loopholes to avoid a lot of those taxes.

This 6% can be made up by increasing the top rates of the personal income tax and removing deductions that primarily benefit those who receive greatest financial benefit from the elimination of corporate taxes. Personal income is much simpler to tax and can be done in a more uniform and fair manner. I don’t think it’s unreasonable to expect those who benefit the most from our capitalist system to pay the lion share of its up keep.

So, what are we actually looking at in terms of rates to have a revenue neutral tax plan that eliminates corporate taxes and offsets it with increased taxes on upper income individuals? Unfortunately, I don’t have access to all the data and an army of government accountants to produce a detailed plan, but there is an online tool at splitwise.com (https://www.splitwise.com/taxes) that allows you to play with tax rates to make your own tax plan. To make this tax plan calculator they had to make certain assumptions and limit the options so we can’t look at this as a real plan, but it does help show the feasibility of the concept.

This tool is based on the 2012 tax year in which the Federal government brought in $242 billion dollars in corporate taxes, so that’s the target to increase revenues from income taxes. You can see the details of what I did below, but essentially, I increased the marginal rate for people making over 3 million to 65% and for people making over 1 million to 50%, people making under that are largely unaffected. Keep in mind these are marginal rates meaning the higher rates don’t kick in until you reach a million, the first million is still taxed at the lower rate. The other two changes I made was to eliminate the home mortgage interest deduction and to treat long-term capital gains like regular income instead of at a special lower rate. These two changes mostly effect higher income people but would affect some people who make under a million per year as well. These changes result in a $259 billion dollar increase in revenue, more than making up for the loss of the corporate tax. In reality these rates would be lower since the elimination of the corporate taxes would mean the rich would have higher incomes and thus pay more personal income tax. In fact, much of the increased taxes on the rich would likely be offset by increased income so many people in the higher brackets may not see much of a reduction to their net pay after taxes.

I can imagine some of you may be thinking such a high rate on the top earners will stifle innovation and the entrepreneurial spirt. The idea that someone won’t start a business out of fear they’d be too successful and have to pay increased taxes if they make over a million dollars seems unlikely. Keep in mind we had higher rates than this in the 1950s and 60s when America was the unquestioned world leader in innovation and dominated the world economy. The elimination corporate taxes will give industry greater resources for research and development and for smaller businesses the new higher rates don’t kick in until their personal income reaches a million dollars. The elimination corporate taxes will do far more to promote economic growth and innovation than an increase in the top marginal tax rate will do to prevent it.

I think this proposal makes for sound policy regardless if you are a Republican or Democrat. The idea of replacing corporate taxes with income taxes isn’t inherently liberal or conservative, it’s simply a smarter way of funding the government and promoting economic growth. If you want a slimmer government with fewer programs the personal income tax rates can be lowered or if you want a more active government, the rates can be increased. Unfortunately, since it’s easy to demonize corporations and the fact that corporate taxes seem more removed from the individual, politically this will be difficult to achieve. However the economic advantages of ending corporate taxes plus the fact that the vast majority of Americans would see little changes in their taxes may make this an idea worth exploring.