There has been a lot of discussion lately about the corporate income tax. Opponents insist that it suppresses worldwide competition and economic prosperity. Others call for an increase in corporate taxation to reach allegedly undertaxed wealth and to reduce government budget deficits. I would suggest that both arguments miss the point. I would eliminate the corporate income tax and levy taxes on dividends and "imputed" corporate profits, net of operating expenses and reinvestments.
I would also propose elimination of the individual capital gains tax and replacing it with a "recoupable" investment tax credit, but that should be left for a separate discussion.
Traditionally, the corporate income tax was levied on what was considered to be a legal "person" separate from the investors, which a corporation truly is. It was considered at the time that there was a fair trade-off for the limited liability granted to shareholder-investors against the "double" taxation of income received by a corporation then paid out as separately taxable dividends to those individual shareholders. Those corporations are considered "Subchapter C" taxable entities, as referenced in the US Internal Revenue Code. At some point in time, there arose a demand for a "pass-through" entity that would allow the limited liability but impose only one level of income taxation at the shareholder level, so the "Subchapter S" corporation was recognized for such purposes by the Congress.
The "S" corporation was immediately grabbed for those smaller businesses owned by a very few people (25 or fewer) who did not "deserve" to pay a double income tax on their business income. Thereafter, the limited liability company was developed for much the same reasons, but it did not have the legal restrictions that "S" corporations have. The limited liability company is truly a marvel of tax simplicity, and I have created several of them for legal clients. So, there are a lot of limited-liability entities out there which are not being doubly taxed. Meanwhile, the larger and publicly-held "C" corporations are cleverly using the Internal Revenue Code (as they should) to avoid paying income taxes, so many profitable corporations are simply not being taxed, and neither are the shareholders. The burden of those lost revenues is being disproportionately imposed on lower-income individuals, as I could explain separately but shall demur for now.
Higher-income taxpayers are undertaxed. That statement will undoubtedly be vehemently derided by a lot of people, but I have worked the numbers, and I know what I am talking about. Besides, the legitimate point of taxation is not to "punish" people but to raise enough money to cover the costs of government. Unfortunately, most of the legislatures (including the US Congress) HAVE used taxation to punish people or otherwise achieve questionable social goals, such as the levying of so-called "sin" taxes that purportedly make those enjoying "excess" pleasures pay for their "sins." I do not agree with that tactic. Taxes should be purposed strictly for raising revenues. And, taxation does not really work efficiently if it taxes static wealth, such as local property taxes, as opposed to taxing transactions, like income. (One might include inheritance-type taxation in the "static" category, but those taxes ideally should tax the TRANSFER of wealth from one person to another.)
A lot of people are clamoring for the so-called "flat tax," like sales taxes, that purportedly tax all persons equally. That is true from a strictly percentage-paid standpoint, but such a flat tax would not provide the economic prosperity we badly need these days. Besides, the goal of "tax simplification" is not truly reached by "flat taxes." It might well reduce an individual's need to keep a shoebox full of receipts for deductions purposes, but most of the Internal Revenue Code and most of the litigation are oriented toward disputes about what sorts of transactions are INCLUDED or EXCLUDED, and that issue is pertinent to all forms of taxation, especially sales taxes. I have litigated the very issue of whether or not a particular Virginia sale to an out-of-state customer was to be taxed. The answer? It depends.
As for the corporate income tax, I suggest that the true cost of such taxes is imposed on customers, suppliers and employees and not on shareholders. Because all corporations are subject to such taxation, it becomes a non-competitive pass-through expense. Customers, suppliers and employees cannot go elsewhere to find a corporation NOT subject to such taxation, so each corporation and its shareholders thus benefit from such a dynamic. I would suggest instead that the corporate-level tax be eliminated entirely, and that the shareholders be IMPUTEDLY taxed at graduated ordinary-income levels for ALL income realized by a corporation, whether paid out as dividends or not with reductions/deductions, of course, for legitimate corporate operating expenses, depreciation and appropriate reinvestment that would truly further the purposes of the corporation. The existing corporate tax is just a meaningless game of dodgeball that ought to be stopped.
I suggest that every corporation, regardless of size, become a pass-through entity.
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