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Old 04-16-2013, 01:51 PM   #1
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Eliminate the Corporate Income Tax

This has been an argument of libertarians for a very long time, but it's articulated pretty well in this blog post: http://www.thedailybeast.com/article...mplify-it.html

The fact of the matter is, our personal income tax code is already very progressive. But because any person can own stock in companies, it taxes everybody's assets equally.

Let's say two families, one rich, the other working/middle class, both own stock in Acme Corporation. The company has a good year and issues a dividend of 1 dollar per share.

The first family, which owns lots of stock in Acme, receives 1,000,000 dollars while the second family only receives 10,000. Both families then proceed to pay taxes on it at their respective tax rates.

Now, if you eliminate the corporate income tax, Acme's net income increases ~25% because money that went towards taxes can now be reinvested or returned to shareholders. So in that scenario, they'd pay the rich family 1.25 million and the other family 12.5k. Then they proceed to pay taxes at their respective rates.

Because we've eliminated the double taxation that occurs on corporations, we can also get rid of the separate passive income tax rates on capital gains and dividends. That means a person like Mitt Romney (or Barack Obama, according to the most recent tax records) can't have a headline effective tax rate of <20% and would get taxed at a rate that everybody can agree is proper-ish (35-39%).

This also completely destroys the point of corporate tax lobbyists, which then only leaves them the Federal Register (economic regulation) to try and game. That means the endless loopholes in the tax code disappear, because the vast majority of them are in the corporate tax code.

It also reallocates resources that were previously used to navigate/dodge the tax code into more productive uses. There is literally zero downside to eliminating the corporate tax code.
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Old 04-16-2013, 02:01 PM   #2
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Now, if you eliminate the corporate income tax, Acme's net income increases ~25% because money that went towards taxes can now be reinvested or returned to shareholders.
That's a risky assumption to take.
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Old 04-16-2013, 02:11 PM   #3
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That's a risky assumption to take.
Those are literally the only two options.
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Old 04-16-2013, 02:17 PM   #4
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Those are literally the only two options.
Well it all depends. I guess you could consider an increase in bonus amounts to senior executives as reinvestment.
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Old 04-16-2013, 04:30 PM   #5
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Given the explosion of top executive pay scales the past thirty years, particularly as a percentage of average worker pay, I would surmise the third option has become a dominant one.

There are many broad presumptions in this thought piece that tend to overlook factors that tend to benefit the wealthy, as is par for the course for supply-side, trickle down, coddle-the-noble-1% economics. One is that given the flat or declining real wage and wealth of the middle class, in stark distinction to the exploding wealth and income growth of the very upper economic tiers, the average middle-class family probably has little or no excess income to invest in the first place.

In the end, the income of the middle-class family, primarily or exclusively from wages, tends to get taxed higher than investment income which is also very amenable to all sorts of "legal" if scurrilous tax shelters, dodges and sleight-of-hand with the end result being a very low rate of taxation.

Also, while the ostensible U.S. corporate tax rates are on the higher side, the loophole-ridden tax code generally results in actual tax rates very much on par with any other modern economy, never mind all the cash that gets "over sea'd" by our vaunted, if not so patriotic, corporations, never to be seen much less captured by our tax codes that turn a demure eye to much of it.

I would tend to agree that an immensely simplified, though not necessarily flat, tax code would be beneficial in not requiring such a diversion of resources to service and game it. Every penny that goes to an accountant, lobbyist or congressman is one not spent on productive enterprise or purpose. Of course, in a game so tilted to benefit our wealthy and corporations, perhaps from their perspective, that is not a good thing as they are doing fabulously with the status quo, it's the lower and middle classes that are getting fleeced.

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Old 04-16-2013, 04:53 PM   #6
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Well it all depends. I guess you could consider an increase in bonus amounts to senior executives as reinvestment.
Which is more likely the outcome. Assuming that it will trickle down is optimistic. Don't get me wrong, I like the idea but at best I would assume this may curb layoff's. From a corporate perspective... It will establish a new baseline and nothing more.
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Old 04-16-2013, 04:54 PM   #7
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Assuming that it will trickle down is optimistic.
Call me an optimist, it has been trickling down. Trouble is, it's been but a trickle.
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Old 04-16-2013, 08:28 PM   #8
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And what of investors in these companies that are not in the US and don't pay US income tax. Or companies that do business in the US but are foreign owned. In either of those cases that tax revenue is lost. The idea only works if if all companies are owned by US citizens.

Besides, according to the USSC, corporations have the same rights as individuals. They need to have the responsibilities as individuals.
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Old 04-16-2013, 09:09 PM   #9
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And what of investors in these companies that are not in the US and don't pay US income tax. Or companies that do business in the US but are foreign owned. In either of those cases that tax revenue is lost. The idea only works if if all companies are owned by US citizens.
Dollars going abroad is a good thing. Because dollars circulating abroad, by definition, must eventually return to the US in the form of demand for US goods and services. In the short run, there is the possibility of deflation, but that isn't necessarily a bad thing. One of the main reasons why borrowing costs are so low for the Federal government right now is because the Chinese and Japanese central banks are willing to lend money at negative real interest rates.

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Besides, according to the USSC, corporations have the same rights as individuals. They need to have the responsibilities as individuals.
The primary purpose of a corporation is to shield the owners from liability while also being able to act on behalf of the owners. That means they have to have basic rights (the most important of which is the ability to own property). The USSC has also determined that among those rights includes the ability to petition the US government. Obviously they still don't have basic rights such as the ability to vote, adopt, marry, etc.

Given the fact that incorporated entities make up a vast majority of the economic activity in the US and that Federal policy has a huge impact on the economy as a whole, it makes sense to give corporations the same ability to petition the government as individuals have. But that's a separate argument altogether.

There is no real point to taxing corporations. It's the owners of the corporation that you want to go after.


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Given the explosion of top executive pay scales the past thirty years, particularly as a percentage of average worker pay, I would surmise the third option has become a dominant one.

There are many broad presumptions in this thought piece that tend to overlook factors that tend to benefit the wealthy, as is par for the course for supply-side, trickle down, coddle-the-noble-1% economics. One is that given the flat or declining real wage and wealth of the middle class, in stark distinction to the exploding wealth and income growth of the very upper economic tiers, the average middle-class family probably has little or no excess income to invest in the first place.

In the end, the income of the middle-class family, primarily or exclusively from wages, tends to get taxed higher than investment income which is also very amenable to all sorts of "legal" if scurrilous tax shelters, dodges and sleight-of-hand with the end result being a very low rate of taxation.

Also, while the ostensible U.S. corporate tax rates are on the higher side, the loophole-ridden tax code generally results in actual tax rates very much on par with any other modern economy, never mind all the cash that gets "over sea'd" by our vaunted, if not so patriotic, corporations, never to be seen much less captured by our tax codes that turn a demure eye to much of it.

I would tend to agree that an immensely simplified, though not necessarily flat, tax code would be beneficial in not requiring such a diversion of resources to service and game it. Every penny that goes to an accountant, lobbyist or congressman is one not spent on productive enterprise or purpose. Of course, in a game so tilted to benefit our wealthy and corporations, perhaps from their perspective, that is not a good thing as they are doing fabulously with the status quo, it's the lower and middle classes that are getting fleeced.
You completely ignored my example. Under the current tax code, the combined corporate-individual tax rate favors high income households. Eliminating the corporate income tax and the capital gains/dividends tax (and therefore properly treating all income as the same) would actually make our tax code more progressive.

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Well it all depends. I guess you could consider an increase in bonus amounts to senior executives as reinvestment.
Executive compensation makes up an absurdly tiny percentage of a corporation's revenue. To think that the increased net income would go mostly towards executive compensation is foolish.
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Old 04-16-2013, 10:16 PM   #10
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Old 04-16-2013, 10:22 PM   #11
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Why not?
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Old 04-17-2013, 12:02 AM   #12
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Why not?
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Of course, for some people, collecting money as efficiently and progressively as possible isn't really the purpose of the corporate income tax. The purpose is to express our dislike of corporations.
I think that accurately sums up the opposition.
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Old 04-17-2013, 02:20 AM   #13
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Old 04-17-2013, 07:37 AM   #14
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I think that accurately sums up the opposition.
I was thinking this as well. Lair and the like but I'm curious to know if there are legit reasons. I'm pretty open-minded to logical answers.
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Old 04-17-2013, 08:21 AM   #15
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I think that accurately sums up the opposition.
You would be correct.
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Old 04-17-2013, 08:21 AM   #16
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Executive compensation makes up an absurdly tiny percentage of a corporation's revenue. To think that the increased net income would go mostly towards executive compensation is foolish.
To make assumptions is foolish.
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Old 04-17-2013, 08:31 AM   #17
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Corporate profits have been extraordinary in recent years. Considering OP is claiming: "Acme's net income increases ~25% because money that went towards taxes can now be reinvested or returned to shareholders" I'm REALLY surprised wages haven't risen. According the the WSJ just yesterday, "wages peaked in 1973, fully 40 years ago." So what's to make me believe that the money would go to shareholders, let alone reach the hourly workers?
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Old 04-17-2013, 10:17 AM   #18
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I was thinking this as well. Lair and the like but I'm curious to know if there are legit reasons. I'm pretty open-minded to logical answers.
You are the arbiter of legitimacy.
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Old 04-17-2013, 11:45 AM   #19
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Corporate profits have been extraordinary in recent years. Considering OP is claiming: "Acme's net income increases ~25% because money that went towards taxes can now be reinvested or returned to shareholders" I'm REALLY surprised wages haven't risen. According the the WSJ just yesterday, "wages peaked in 1973, fully 40 years ago." So what's to make me believe that the money would go to shareholders, let alone reach the hourly workers?
Because it has been going to shareholders. The current dividend yield for the S&P 500 is 2%. Given the fact that there has been a sharp run up in stock prices between 2009 and now, maintaining the historical average yield means that there is no evidence that corporations have been decreasing their dividend and buyback activities in the face of rising profitability.

When companies begin amassing more and more cash on their balance sheets, their shareholders always pressures management to distribute the money to shareholders. Apple resisted issuing dividends for the longest time, but even AAPL now has a 2.6% dividend yield, apropos given their 100 billion dollar cash pile.

Edit: The fact that you even have any skepticism that corporations would issue more dividends underscores your ignorance in finance. Workers work for the company. But the company works for its shareholders.
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Old 04-17-2013, 11:50 AM   #20
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Because it has been going to shareholders. The current dividend yield for the S&P 500 is 2%. Given the fact that there has been a sharp run up in stock prices between 2009 and now, maintaining the historical average yield means that there is no evidence that corporations have been decreasing their dividend and buyback activities in the face of rising profitability.

When companies begin amassing more and more cash on their balance sheets, their shareholders always pressures management to distribute the money to shareholders. Apple resisted issuing dividends for the longest time, but even AAPL now has a 2.6% dividend yield, apropos given their 100 billion dollar cash pile.

Edit: The fact that you even have any skepticism that corporations would issue more dividends underscores your ignorance in finance. Workers work for the company. But the company works for its shareholders.
Yadda, yadda. What's in it for the workers?
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