Corporate Tax Rate Reduction: Zero Percent Would Be Better Than 15

Cutting the rate is not enough

 

Donald Trump’s tax plan calls for reducing the corporate-income tax to 15 percent. That’s about 15 points too high.

 

Mitt Romney was mocked for insisting “corporations are people,” but he was right: A corporation is a cooperation, a group of people acting together as one corpus for a particular purpose. And it would be easier and more simple to tax the people.

 

Corporate income is unlike individual or household income in that it is broadly defined as income minus expenses, meaning ordinary business expenses, whereas the individual taxpayer can only deduct certain narrowly defined expenses, such as mortgage interest. The simplified version: If Corporation X makes $1 billion and has $900 million in expenses, then it has $100 million in taxable income, which is subject to a top rate of 39 percent. Most corporate income is taxed at the highest rate.

 

Even the simplest version of this structure creates opportunities for shenanigans and incentives to pursue them. But the real-world version isn’t simple at all, and it makes things much, much worse. Politicians create tax incentives that reward businesses for doing things they like and punish them for doing things they don’t like, while corporate interest groups invest a great deal of time and energy in lobbying for tax favors. Some of that is pretty crude: Democrats have for years been trying to monkey with business-expense rules to punish companies for outsourcing, so that a cardboard box bought for moving business records from the headquarters in St. Louis to the warehouse across town would be a deductible expense but the same box used to move business records to a new call center in the Philippines would not be deductible. Some of it is more subtle and more complicated, i.e., engineering deals and business units in such a way that artificial capital losses and expenses can be racked up and stored away to reduce (for tax purposes) future income. There’s an old joke that General Electric is the world’s greatest tax-law firm, with a sideline in manufacturing, but consider also that blockbuster films that do billions of dollars in business routinely show little or no profit for tax purposes. Famously, Return of the Jedi has never made a dime, so far as the IRS is concerned.

Read more at:

Corporate Tax Rate Reduction: Zero Percent Would Be Better Than 15 | National Review