I wrote this in 2011, and I still believe in the essential idea. In the most recently available data, the federal government collected $200 billion from the corporate income tax. Eliminating tax loopholes and radically simplifying the code would undoubtedly unleash greater economic activity, offsetting much if not all of the supposedly “lost” revenue.
The other point I failed to make when I wrote this essay was that the corporate tax, regardless of its rate, is paid at the end of the day by individuals, not by the faceless “corporation.” These taxes are paid in the form of lower wages to employees and/or higher prices paid by consumers. In addition, we must factor in the very real fictional costs and dead weight loss represented by the hundreds of billions spent by corporations: on accountants, tax attorneys, and lobbyists. All of these dollars are spent in an effort to game the system to lower the effective tax rate in any way possible, or to lobby for even more special favours from the politicians.
My radical proposal is to eliminate every single deduction, slash the rate to 10%, and I have no doubt of the ultimate benefits to our economy. Bonus – we force lobbyists and attorneys to actually do something productive.
Here is the original, unedited essay:
Insufficiently bold thinking from Washington.
Meanwhile, so many people are finding it impossible to land work. The long-term unemployed and underemployed grow ever more discouraged, and our economy is suffering as a result. The word “malaise” comes to mind – reminiscent of another time of deep skepticism in our future in this country.
Envy and resentment and the political opportunists that seek to feed off those emotions are standing in the way of solutions that might just very well get us going again. Here’s an idea…just one. I’d be interested in your thoughts.
The corporate tax rate in this country – at 35% – is right among the top for developed economies around the world. What do we think we accomplish with such a rate? We already know that despite the advertised rate, many corporations get by paying much lower effective tax rates due to special favours, deductions.
Not only that, but US corporations have been sending ever-more of their operations overseas. Many say that they do this only for the lower cost of labour in places like China. True, but they are also taking advantage of lower tax rates or other incentives in these other locations.
Right now there are trillions of dollars on the balance sheets of the foreign subsidiaries of US corporations. Those dollars will not come back here, because if they do they are hit with that 35% tax rate – in addition to the corporate tax already paid in the host nation.
If you think about it, every dollar that goes toward capitalizing a corporation – whether it’s equity or debt captital – has already been taxed at least once (and probably multiple times) before it makes it onto the corporate balance sheet.
A corporation, at the end of the day, is nothing more than a collection of individuals. Before I can invest a dollar, or lend a dollar, I have to earn it. And of course, everything we earn as individuals is taxed. I’m saying that in a perfect world we would not tax corporate earnings – at all.
We first get rid of all corporate subsidies. All of them. Eliminate the deduction for interest expense. The current code makes it more attractive for companies to borrow capital than to raise it from owners. They can deduct interest expense, but not dividend payments. So we encourage companies to load up on debt. We’ve seen what can happen with too much debt.
Then. Here’s the best part. With all deductions and perverse incentives eliminated…
Cut the corporate rate to a flat 10%. Now we have among the lowest rates in the world. Companies can bring that cash overseas home if they like. No tax on repatriated earnings.
Announce to the world: America is open for business again. This will be an enormous incentive for corporations to put our citizens to work again. We can once again be a nation that makes things and not just one that consumes.
Let me know what you think. Thanks.