Why we should eliminate corporate INCOME taxes.

Another message from “Farnham for US Senate”

Lately, there has been a lot of news about “corporate inversion.” Essentially a large US based corporation essentially buys a foreign company based in a country with lower corporate income tax rates, but designates that the acquisition is now actually the top of the corporate structure. With this stroke of paperwork (producing nothing), the net income after taxes is improved for the stockholders. Aside from the public relations (which might be costly, especially in consumer products), this is what management should do: Maximize the returns to stockholders.

This is just a new wrinkle in the idiocy and waste that is taxing corporations on income.

Since customers pay corporate income taxes anyway, how about we take away the corporate incentive to lobby to complicate the tax code by eliminating the corporate income tax altogether. Now of course they should pay fees for services, such as property tax to pay for police and fire coverage and taxes on gasoline an diesel fuel to build roads and mass transit. But all manner of evil and waste are eliminated at no necessary revenue decrease by ending corporate income taxes. So what happens? Well, first off, the first country to eliminate the corporate income tax wins. (New Hampshire, with no personal income tax, might become a corporate headquarters darling, but that is parochial.) Now, instead of “inversion” acquisitions, companies will race to bring their headquarters and highest paid executives to the US. Sweet. They also will only need one set of books, so “tax accounting” and all the associated distortions and unproductive waste (that currently is very beneficial to the bottom line without producing anything) goes “poof.” Companies will save a (Burger) King’s ransom by not having to do all manner of accounting adjustments to minimize tax. Operations and cost accounting will drive corporate behavior and they will be out of the income tax credit business.

Prices will drop. Profits and dividends will rise. Individuals will get increased income from investments and they will pay tax on that. Everyone wins except the lobbyists and legislators who lobbyists pamper and fund to win favor.

Ending corporate income tax eliminates waste and improper influence by economic force.


About rsiz

Father and Husband, Oracle Technology Scientist and Consultant, planning to end poverty for citizens and legal US residents Lebanon, NH · http://www.rsiz.com See my wife's puzzles at thingamajigsaw.com
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9 Responses to Why we should eliminate corporate INCOME taxes.

  1. Pingback: Why we should eliminate corporate INCOME taxes.

  2. Toivo says:

    Estonia has no corporate income taxes over 10 years now. What has changed during last 10 years? Did prices drop? No, because government had to raise indirect taxes like licence fees or taxes on gasoline and raise VAT to compensate the loss of corporate income tax. Also, government had to decrease funding of state services like police or fire fighting department. Did Estonia benefit from dividend payout to stockholders? No, because stockholders could keep these reserves forever and use it for tax free investments. As a result Estonia has very high taxes and very low level of taxing compared to GDP. Life is more expensive and state services are declining.

  3. rsiz says:

    Let’s see, I think you mean the prices charged by corporations did drop, but the net cost to the consumer rose due to tax increases on licenses and sales. If I read that correctly, you did in fact eliminate the wasteful cost of income tax accounting for corporations. I’m not sure I follow the math about having high taxes but a low level of taxing compared to GDP. That aside, claiming that reduced state services is a result of ending corporate income tax does not follow. What actually follows is that with the new taxes more transparently paid by the consumers, they collectively voted in favor of lower taxes and less services (or influenced their legislators in that direction). That is not a valid excuse to continue the waste and opacity of taxing corporations on income. Eventually stockholders dispose of holdings; until they do, that is working capital for the business. When stockholders dispose of holdings with a gain, then you tax them on the income. It is possible for there to be a short term dislocation, but I doubt it has prevailed over a ten year period. It sounds to me like you want to make an argument for higher personal taxes and more state services. That problem is completely askew to the efficiency of ending corporate income tax.

    • Toivo says:

      When taxes are raised then this affects everything. VAT raise will affect every aspect of the life of your company and the life of your workforce. The same with raising taxes on gasoline. Your workforce needs more salary to cope with this. Smaller companies start loosing their competitiveness. In general, it is harder to earn income, but you can avoid paying taxes from this.
      About tax ratio to GDP. Estonia has very high personal taxes and also high consumer taxes. Similarily to Finland for example. Total tax revenue as a percentage of GDP is around 32% for Estonia and around 44% for Finland.
      Reduced state services will follow as soon as state budget is decreasing. Of course, government tries to compensate the gap by increasing consumer taxes, but this has an opposite efect.
      Btw, Estonia had very simply tax system. We still do. So this argument won’t work in Estonia. In Estonia politicians said that dismissal of corporate income tax is needed to revive our economy by making the tax system more appealing to the investors. And then they will create more jobs and generate more turnover which will compensate the loss of corporate income tax. Unfortunately investors soon realized that they need good infrastructure also.
      And I know stockholders who have generated corporate income but have not made any dividend payment over 14 years.
      Ps. People were fooled into voting for lower taxes but no one told them that this will be in expence of diminishing state services.

      • rsiz says:

        The argument works because corporations spend money on income tax calculations no matter how simple they are AND they take actions to minimize taxes in keeping with the internal rate of return instead of focusing efforts on making and selling the best products at the best prices. Further, no matter what else, the customers pay the taxes at the end of the day. I suggest you focus your perception of failures in the economic system of Estonia elsewhere. Personally I’d start with the VAT, but that is very embedded in European culture. Voter education might help, too, since you think the voters were fooled. Your statement that some stockholders have generated corporate income but not taken a dividend is confusing. Do you mean they sold stock? If so they should be taxed on the gain. If not, I think you are talking about capital appreciation, which is not income (yet). When they do sell, they will have income. Until they sell, the corporation has more working capital. That works out just fine in the long term. And OF COURSE personal taxes rise when corporate taxes are eliminated. The payment just becomes transparent and the taxes are not part of product cost nor do they cause wasteful tax accounting on the part of the corporation.

      • Toivo says:

        So your main argument against corporate income tax is that corporates spend too much money on calculations? I do not understand this. They need to calculate their income anyway for paying out dividends to the shareholders. And if calculating tax from income is too expensive (involving laywers etc) then first you should consider simple rules for taxing corporate income.
        Also shareholders know how to avoid paying taxes from dividend. So it only means that shareholders start avoiding taxes instead of corporations.
        About generated corporate income. Some people use holding companys to generate corporate income. They have no desire to pay it out nor invest it. So this is lost money for the state. For a while anyway.
        And last. You claim that corporates are spending too much money on calculating income tax. And you say that calculation of higher personal taxes is much cheaper and more transparent than corporate income tax calculation? How is that so?
        Also I do not understand how you can say that for example raising excise tax on Gasoline do not affect product costs? It does, in direct and indirect way.

        As a conclusion – who and how much will gain from dismissal of corporate income tax?

  4. rsiz says:

    The main objection is that having a corporate income tax drives corporations to equally value saving a dollar of tax with producing enough product to make a dollar of profit. Because of this massive amounts of money are spent both in lobbying for tax treatment that is effective for their specific case and maintaining two sets of books at cross purposes: One for minimizing profit statements to the taxing authority and the other for optimizing and monitoring actual operations. BILLIONs of dollars are wasted in this manner because we tax corporations on net income.

    Tax code simplification plans always fail and result in more pages, more rules, more politics, and more distortions of reality. The only reform possible to actually work is zero.

    Shifting any taxes currently indirectly paid by customers to direct taxes is inherently more transparent. There is not much to understand about that: When the corporate tax is embedded in the price structure of the product you do not see it at all. Any taxes directly levied on individuals (individual income tax, for example) or collected on retail sales (such as gasoline) are completely transparent.
    You see the cost of the product and the cost of the taxes. I do not understand what is difficult to understand about that. It is completely transparent.

    The winners are everyone. Billions for the elimination of wasteful accounting that does not produce product to produce relative profit. Billions more for the singular focus of accounting to be more productive. This is nothing new. I suggest you read a little Milton Friedman, who can explain it much better than I can.

    • Toivo says:

      After dismissal of corporate income tax billions of dollars will be spent on optimizing shareholders taxes.

      So, tax code simplification plans always fail and you suggest the simplest version of them all? 🙂

      Which one is cheaper – calculating corporate income taxes or calculating tax exemptions on direct taxes?

      And lastly. Estonia has no corporate income tax for over 14 years. Where could I write to inform all these rich corporates about such of a opportunity?

      • rsiz says:

        Elimination will not be opposed by the deep pockets of corporations. Simplification of the corporate tax code always fails because at anything more than zero untold sums are spent to create loopholes. I suspect you understand this.

        Popular support for a flat tax on individuals however can be mustered and in any case does not interfere with corporate goals of production. So yes, calculating individual taxes is of negligible cost and could become even lower. Your prediction of billions of dollars of increase in the tax calculations for individuals is simply wrong. Individuals with substantial net worth already spend a lot on tax calculations. So the net cost is the elimination of the corporate income tax costs and no change in individual tax calculation costs.

        I cannot pretend to solve the unique problems of Estonia. You told me the people were fooled and I suggested education. I explained the real savings in both cost of calculations and misdirection of corporate resources. If I take your words at face value all the problems you have described would be even worse if you had kept the corporate income tax. Good luck. Finally, I simply cannot construct any meaning from your last question. Possibly that is a language barrier, but I am unable to even parse it. Thanks for your comments.

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