Tax Reform Proposal #2: Eliminate Corporate Income Taxes

As promised, here is my second tax reform proposal: do away with the corporate income tax.  Now, I know, this is politically unpopular because we all love a good populist “stick it to the man” type thing, but hear me out.

To begin, remember my criteria for tax reform: justice and honesty.  Fairness is not listed because fairness just seems to mean whatever the proposer wants, which is far too subjective to be a workable standard.

Now, how would eliminating taxes on “big corporations” help with justice and honesty in our tax policy?  Actually, it would help on a number of fronts.

First, it would just about completely eliminate “corporate welfare,” “crony capitalism,” etc., etc.  These programs, regardless of the moniker applied, are, in my opinion, generally naughty or stupid or both.  Most of these special benefits extended to big corporations and related special interests are found in the tax code.  The number of special tax advantages for various industries is truly astounding.  Just take a look at all of the sections in the Internal Revenue Code dealing with the airline industry, or oil and gas, or green energy, or . . . .  These types of special favors from the government are antithetical to republicanism.  If there were no tax on corporations in the first place, then these monkeyshines could not exist.

Second, it is impossible to make a tax fall on a corporation in the first place.  Oh, you can get them to fill out a tax return and send some money to the U.S. Treasury, but you can’t actually land a tax on them.

Consider for a moment what happens when taxes are raised on Wal-Mart.  Wal-Mart has essentially two choices—reduce its profits (thereby passing the tax on to its shareholders) or raise its prices (thereby passing the tax on to its customers.)  These are the only two options.  My instinct is that most companies pass as much as the market will allow on to the customers.  When that fails, it reduces profits, which passes the tax burden on to the enterprise’s owners.  If that happens enough, then the company just goes out of business.

Now let’s apply the tax criteria I discussed earlier.  How much taxes do you pay when you buy a loaf of bread at Wal-Mart?  Your first answer is likely to tell me how much you paid in sales tax.  But, that is not what I mean.  Rather, I am asking, how much of the price of the bread went to pay Wal-Mart’s income taxes?  Don’t know?  I don’t either.  And, it gets worse.

When Walt-Mart bought the bread, the company that made the bread also included its income taxes in the price it charged Wal-Mart for the bread.[1]  Further, the various suppliers of materials to the bread company (flour, milk, oil, plastic for the bag, etc.) all included their income taxes in the price of their products.  Thus, what we have is a massive income tax compounding effect where a good portion of the price of most goods that we purchase in America actually goes to pay the taxes of the companies involved in bringing those goods to market.

(And, again, it is really worse than that.  These companies also pass on the multitude of other taxes they pay.  Examples include taxes they pay on fuel, real estate and other property taxes, unemployment insurance (read taxes,) and payroll taxes.  Customers (or shareholders) must ultimately bear all of these taxes as well!)

So, to put it bluntly, the corporate income tax system is a lie.  It has a certain populist flair.  It makes people feel good because they are sticking it to those “big, bad corporations.”  After all, we are just asking them “to pay their fair share.”  But, the reality is, they just can’t.  As demonstrated, they pass their tax burden to either their customers or their owners.  Accordingly, the corporate income tax system is simply a big lie.  It goes without saying that lies fail the honesty criteria.

Third, and related to my previous point, corporate income taxes make it all but impossible for us to actually assess tax policy in America because we all have no idea how much we are actually paying.  As noted, we don’t know how much of the price of bread is actually related to the tax burdens of the bread producers all the way up the chain.  Without understanding what our true tax burden is, we can hardly determine whether our tax system is just.

Finally, eliminating the corporate income tax would have other meritorious effects. It would encourage companies to bring factories and workers back to the United States. It would make exports of our companies more attractive in foreign markets because the prices would not include these hidden taxes. It would remove the great uncertainty brought on by tax changes helping companies to plan for the future. It would lead to either the expansion of these companies’ businesses, which would include hiring new workers, or it would lead to an increase in the wealth of the shareholders.  (Both are good outcomes.) It would remove at least some of the incentives these companies currently have for lobbying as well, which would undoubtedly be a positive. It would remove distortions from the marketplace caused by corporate welfare programs and would lead to more accurate pricing of goods, which should result in a better allocation of resources.  Looking at it rationally and not emotionally, it is hard to find a drawback.

Sounds great, right?  So, why not do it?  It is just too popular to say we are going to tax the big guys to help the little guys.  (As if little guys don’t buy bread.)  Further, I fear many of our rulers like keeping us in the dark about how much we are actually paying.

[1] And, yes, I know that Wal-Mart gets to deduct how much it paid for the bread.  So, yes, that provides a marginal reduction in the issue of the compounding of these taxes, but it doesn’t eliminate it.  Do the math, you will see what I mean.