What to do about low effective corporate tax rate?
April 10, 2012 9 Comments
Maybe we should give up, drop it to zero, and seek to collect taxes on corporate profits via indirect means (dividends and capital gains).
Pat Garofalo notes that many corporations pay a far lower effective corporate income tax rate than the nominal rate of 35 percent–including 30 major corporations that paid no tax, or who had a negative income tax over a 4 year period. The main reason that I think the many calls for corporate tax reform of ‘broadening the base while lower the rate’ are likely to fail, is that a reduction to a rate of say 20 or 25% while removing exemptions and deductions will represent a profound tax increase on corporations who now pay little or not corporate income tax. Presumably they obtained their very low effective tax rate through being effective advocates for themselves, so there is little reason to believe such a reform can withstand the political pressures inherent with such a proposal.
One item that I suggest in my book Balancing the Budget is a Progressive Priority (out in May 2012), is to go ahead and reduce the corporate income tax rate to 0%, make dividends and capital gains normal income, and to then raise the top personal marginal income tax rate. The burden would fall largely (but not wholly) on higher income persons who would accrue most such income. The share of total federal tax receipts produced by corporate taxes has been between 10 and 13% since 1980 (~2% GDP), a precipitous decline since the 1950s. The table below shows federal tax receipts by source. There is lots of evidence that it is very hard to collect a predictable amount of tax from corporations.
If we moved to a 0% rate on corporate income (or very low rate), this would have to be done in conjunction with an overhaul of the individual income tax code that prevented individuals from becoming corporations and paying themselves in ways other than salary, capital gains and dividends. However, we should be able to figure that out. And we could end the strange dance in which some decry the high corporate tax rate while many corporations pay none or a very low effective rate, and it raises a relatively small slice of federal tax receipts.
We could of course redouble efforts to collect more in the way of corporate taxes, but treating dividends and capital gains as normal income and raising the top personal income tax rate seems to me a better way on many fronts.