Amid the myriad disputes over the tax-reform plans slowly moving forward on Capitol Hill, there has been widespread consensus that America’s corporate taxes are too high. Not only do nearly all Republicans in Washington want corporate-tax cuts, but Senate Minority Leader Chuck Schumer, D-N.Y., and House Minority Leader Nancy Pelosi, D-Calif., have signaled their willingness to go along. So did the administration of Barack Obama.

The case is compelling. U.S. corporate taxes are among the highest in the developed world no matter how one counts: The statutory rate (about 39 percent when state and local taxes are included) is the very highest in the developed world, and even if one measures the average effective tax rate of 29 percent or even the marginal effective tax rate of 18.6 percent, the U.S. still comes out at or near the top. This renders American businesses less able to compete globally.

Yet the proposed tax relief — which, even under the most ambitious GOP plans, would bring rates only to about the average for the developed world — don’t go far enough. If American leaders really want strong tax reform, they should eliminate the corporate-income tax altogether. Doing that ought to have appeal to groups on both the left and the right.

The most important fact about the corporate tax is that the paper documents and legal understandings that make up a corporation can’t literally pay taxes themselves. A corporation asked to pay a tax will always have to respond by reducing wages to workers, raising prices for customers, reducing returns to investors, or some combination of the three.

Insofar as this tax revenue funds necessary, efficient, and effective government services, of course, there’s nothing wrong with the fact that the state takes a share. But how the burden of corporate taxes will be borne is hard to predict and does not necessarily keep with anyone’s vision of good public policy.

The best evidence from studies of what economists call “tax incidence” suggests that consumers are the most resistant to paying corporate-income taxes because they can always buy from a company’s competitors. Workers, who have to go through the trouble of searching for a better job, bear the brunt of the burden.

But the wisdom of eliminating the corporate tax remains, independent of who actually pays it. If elected officials are convinced that investors and corporate executives are undertaxed, the better way to target them would be directly — through taxes on capital gains, dividends, and high personal incomes — rather than imposing an indirect tax on the corporations they control and hoping the owners don’t figure out a way to get somebody else to pay. A world without a corporate-income tax would be just as capable of soaking the rich to fund a larger range of government services as it would be of encouraging private investment, community involvement, and personal responsibility.

There are dozens of spin-off benefits of a world without a corporate tax. Billions of dollars spent complying with the tax code would be free for more-productive uses. With no corporate tax, there would be no reason for the IRS to audit nonprofit organizations, a power that administrations of both parties have used in politically motivated ways. Corporations would have far less reason to play politics in the first place, since they could no longer seek special favors in the tax code, which should make liberals happy. And conservatives could cheer an end to the unfair double taxation of dividends and capital gains.

The lost revenue from eliminating the corporate tax shouldn’t be much of a problem. Since some of the money currently paid in corporate-income taxes would be paid out in the form of higher wages, dividends, and capital gains, tax collections on these forms of income would rise even if the tax cut itself did nothing to stimulate the economy. And given that eliminating the corporate tax would create a huge incentive for companies to invest domestically, an economic boom seems all but certain. There might well still be some sort of revenue gap, of course, but there are plenty of other ways it could be filled. Other existing taxes might have to rise modestly, or policymakers could consider alternatives ranging from a value-added tax that falls on consumption to levies on externalities such as carbon pollution.

If they want to break the stalemate that may derail tax reform, policymakers have to offer bolder plans than they have. A plan to eliminate the corporate-income tax entirely would be a very good start.

Image by OGI75


Featured Publications