21 December 2011

Eliminate the Complexity

That’s my recommendation for the corporate tax:

Those advocating a cut in the corporate tax rate today generally ignore the tax on dividends, as well as many other provisions of United States and foreign tax law that may reduce the effective tax rate well below the statutory rate.
A recent study found that only 25 percent of the largest American corporations pay anywhere close to the statutory corporate tax rate of 35 percent on their earnings, while 40 percent pay less than half that rate.
Indeed, General Electric, the nation’s largest corporation, paid no federal corporate taxes in the United States in 2010, according to a report in The New York Times.

The sheer diversity of effective tax rates binding corporations—even though there is only supposed to one rate—suggests that the corporate tax rate is being used as a political tool.  This perception is certainly encouraged by GE facing an effective rate of zero.  If, as the current evidence suggests, the corporate tax rate is used as a political tool for punishing and rewarding certain corporations, then perhaps abolishing the corporate tax rate would be a good step.

While abolishing the corporate tax would not lead to massive economic growth, it would certainly be a step in the right direction.  In the first place, corporations could actually focus on producing things instead of playing pointless political games.  Furthermore, government costs could be slightly reduced—the natural result of reduced compliance requirements and the corresponding enforcement costs.

While corporate taxes do not apply to the vast majority of businesses, nor do they account for anything but a minor amount of tax revenue.  However, this is no reason to accept an incredibly stupid, highly politicized tax system.

2 comments:

  1. I was thinking about this: why not put a page limit on tax returns? Something like 100 pages. Generous enough that nobody could complain about it without looking like a dick. When GE filed the 57000 page tax return this year, the IRS should have rejected it as an insult and held GE in contempt, the same way the IRS would reject your or my tax return if we tried to pay our taxes entirely in Walmart coupons.

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  2. @GMF- that's not a bad idea. However, given how small a portion of tax receipts the corporate tax accounts for, and also given the disparity of the effective rate among firms, it seems like it would be less problematic to get rid of the tax than to reform it.

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