A Great Idea

…that will never happen, at least in this administration/Congress: reduce the corporate tax rate to zero:

In addition to New Deal spending programs, a series of new taxes were introduced that crushed the innovation, risk taking, and growth plans of entrepreneurs, corporations and investors. From 1930 to 1940, the top marginal income-tax rate rose to 79% from 25% while the corporate income-tax rate doubled to 24% from 12%. In addition, Roosevelt tacked on an excess profits tax and undistributed profits tax. He imposed an excise tax on dividends. Even the new Social Security payroll tax added 2%. As a result, the New Deal forced the allocation of money away from the private sector. …

The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.

It’s often been said that corporations don’t pay income tax — they just collect it, either from shareholders, employees, or customers. Just eliminate it, if you want to see job growth. And if you’re not going to cut capital gains, at least index the gain calculation to inflation, so that people aren’t taxed on false gains.

10 thoughts on “A Great Idea”

  1. An excellent idea. In order to implement it, other taxes would have to be raised to make up the difference with the more obvious taxes. More obvious pain for the taxpayers of actually handing over the money.

    If the classical liberal ideal is to make progress, the statist establishment should be attacked via taxes. Or as Reagan said, “Taxes should hurt”.

  2. I think that there should be corporate tax. Otherwise, people will organize as corporations and stop paying tax except on distributions to themselves. But that corporate tax paid should be credited toward the shareholders’ income taxes. The concept that would bridge our positions is that there should be corporate level withholding.

  3. Cap gains should be indexed to inflation and then reported as income.

    While we’re in dreamland though a simple income tax with no loopholes, deductions or credits would be nice too. We could make the tax rate negative at the very lowest brackets creating a floor under which no one would fall, allowing us to eliminate welfare and social security in one fell swoop.

  4. Sam,

    There probably should be a corporate income tax, but not for the reason you mention. It doesn’t matter if everyone incorporates. Any value they extract from the corporation would be reported as income anyway. No, the problem to avoid is over-spending by corporations on non-essentials. A corporate income tax of 0% would encourage wasteful spending on company cars, office furniture, espresso machines, etc.

    If you want to avoid that problem corporations should be taxed on revenue, not “income.” Income’s an accounting fiction, and there are a million ways to game it.

    The real problem from America’s competitiveness is that corporations are subject to both Federal and State income taxes. Combined these rates are far higher than Europe or Japan.

  5. Indexing capital gains calculations to inflation would be a great idea, of course, and I wonder why a President couldn’t accomplish that with a simple executive order to the IRS. Possibly issuing the order on his last day in office. As far as I know, Congress has never specified the manner in which capital gains are to be calculated — have they?

  6. McGehee,

    Would you rather than espresso machine at your house or your office? What if the one at the office was 30% cheaper for tax reasons? What if you’d never have bought it at full price?

    A tax rate at 0% is effectively a subsidy to corporate spending (relative to spending of personal income). Subsidies always create wasteful spending at the margin.

  7. Another thing to consider is a comparison between corporations and business partnerships. They should have very similar tax consequences to the point that there’s no preference. I have no idea how a 0% corporate tax would look like for a business partnership counterpart.

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