High Time to Eliminate Corporate Taxes
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By Lawrence Hunter, Ph.D.
In the latest installment of the long-running serial "Super Rich Guy Calls for Higher Taxes," hedge fund billionaire Tom Steyer recently made a $20 million donation to an initiative to raise California's corporate tax rate. Steyer thinks businesses aren't paying enough into the state's coffers.
This initiative is one of myriad proposals at the state and federal levels for higher taxes on business income. And they couldn't be more misguided. America's corporate tax rates shouldn't be ratcheted up, they need to be eliminated.
Corporate taxes are inefficient. They're unfair. They smother economic growth. They exact a heavy cost on the middle class. And, here's the real kicker, the corporate income tax is such a drag on investment and economic growth there is good reason to believe that getting rid of it would actually raise total revenue to the government.
The federal tax levied on corporate profits is officially 35 percent. Over the past few decades, however, big companies have carved so many special favors into the tax code that many businesses end up paying at a dramatically lower rate.
Look at the 2011 returns of some of the country's biggest corporations. Last year, Apple paid about 9 percent in corporate taxes. GE's effective tax rate was around 7 percent. Wal-Mart paid 24 percent.
Now compare those rates with that paid by the American industry most likely to get called out for not paying its "fair share": the energy sector.
The same year Wal-Mart paid a third less than the statutory tax rate, and Apple and GE whittled down their tax rate to the single digits, ExxonMobil, Chevron, and ConocoPhillips - the three biggest U.S. oil companies - each shouldered a tax burden above 40 percent, higher even than the U.S. statutory tax rate. And 2011 wasn't an anomaly. In 2010, Exxon, paid total taxes equal to 45 percent of earnings.
It's despicable for politicians to single out the oil and natural-gas sector for vilification. And this massive tax-rate disparity also speaks to the fact that the modern corporate tax code is unbelievably complex, and, in fact, unfixable - especially as long as the government continues to insist on taxing U.S. companies on a worldwide-income basis. Far from a uniform rate levied fairly on all American businesses, the corporate income tax is a tool exploited by the well-connected to snatch up special favors and handicap their competition.
Moreover, a fixation on corporate tax rates ignores a basic economic fact: A corporation is just a group of human beings working together as a single legal entity. Ultimately, it is actual breathing people who are paying these "corporate" taxes, along with myriad other taxes they pay on the same corporate income once it is paid out to stockholders in the form of dividends or realized as capital gains
When government taxes corporate income, corporations "pay" the tax by reducing capital investment and lowering their payments to workers and shareholders, and in the form of the reduced value of the company (reflected in share prices) as markets discount for future tax obligations and lower earnings.
Public pension funds are heavily invested in stocks, so millions of middle-income Americans are paying corporate taxes through reduced values for their retirement accounts. Corporate taxes actually shrink the nest egg for many of the decidedly nonrich in this country.
Opponents of repealing corporate taxes tend to fret about the lost public revenue. But here's the truly astonishing fact about the nature of economic growth: Repealing the corporate rate would very likely lead to increased tax revenue for the government.
Without this massive burden, private industry would grow much faster. The economy would expand, and so would tax revenues. The public Treasury would lose one revenue pipeline but several other sources of revenue, such as sales taxes, individual income taxes - including taxes on interest, dividends and capital gains - would generate considerably more tax dollars.
In a new analysis of the corporate income tax, Steve Entin, president of the Institute for Research on the Economics of Taxation, employed a macro-economic model that estimates the changes in the supplies of capital, labor and output that occur when policy changes alter the after-tax rewards to investors and workers. According to Entin's analysis, ending the corporate income tax would generate sufficient increases in the capital stock of private sector plant and equipment (18 percent) and additional GDP (6.2 percent) that overall federal revenues would increase by approximately $33.3 billion annually.
President Obama himself has proposed dropping the federal corporate tax rate from 35 percent to 28 percent. Even he recognizes the drag on the economy. But a rate reduction doesn't go far enough. The levy should be eliminated entirely.
Lawrence Hunter is president and co-founder of the Social Security Institute. He is the former vice president and chief economist of the U.S. Chamber of Commerce and a former Reagan White House advisor.
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