I have heard a lot of pleas to abolish the corporate income tax over the last forty years. Most of them are premised on the burden of double taxation of corporate earnings: once when earned by the business and a second time when they are distributed as dividends to shareholders. Supposedly this double whammy reduces investment and ...(you can fill in the blank). That argument has never carried much weight with me because many companies don't pay much or any dividends. Furthermore, much of the dividend stream is paid to pension funds and other recipients that further defer or entirely avoid the second round of tax.
My problem with the corporate income tax is the strong incentive it gives to debt finance rather than shareholder equity. What would happen if we abolish the 35% Federal tax on company profit but tax dividend income and capital gains on shares sales as regular income in the hands of the recipients? Dividends paid to foreigners would be subject to a withholding tax. This change would put a lot of corporate treasurers, accountants and attorneys out of work. Ditto for auditors, bankers and financial advisers. In the short term there would be a spike in the unemployment rate. But all of those people are very clever and would quickly find jobs during real work.
WHAT DO YOU THINK?
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Highly recommended film: Margin Call starring Zachary Quinto, Stanley Tucci and Kevin Spacey--a fictionalized account of the fall of Lehman Brothers.
2 comments:
In Australia we have Corporate Tax and Dividend Imputation, that provides share/stockholders who receive dividends with tax rebates (relief in form of franking credits) which offset previously paid corporate tax. This also helps to divert Government's reliance from Personal Income Tax (which is substantially higher than in the US) to corporate tax as well as encouraging business investments.
In the lower marginal (personal) tax brackets (i.e.retirees) franking credits also represent extra income (holiday money) as it is refunded through income tax returns. Hence, their selection of shares/stocks is often based on dividend streams and not only growth (curtails the speculations!).
Dear Mr. Ahnert
While I agree with you that abolishing corporate income tax may put the treasurers, accountants and attorneys out of their tax avoidance work. However I think this may also attract investors to invest in USA because they were scared of the high tax rate in the past, and such investors will being other work to these propfessionals.
We enjoy a low profit tax rate of 16.5% in Hong Kong and we have a fair amount of new investors all the time. I have to admit that China is also an important factor contributing to the stability of our economy.
This is my amateur view and I am sure your economists can offer much better comment.
George Ng
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