Policy Studies Governance

Corporate Income Tax: More trouble than it’s worth

Sept 22, 2016

Politics often yields suboptimal policy. In some cases, visible benefits flow to a select group at the expense of the largely invisible broader public. In others, visible costs are imposed on a select group, despite the largely invisible expenses borne by the broader public. Russell Long – the late U.S. senator from Louisiana and longtime chairman of the Senate Finance Committee – summed up this paradigm with the mantra: “Don’t tax you, don’t tax me, tax that man behind the tree.”

The corporate income tax is one of the best examples we have of attempting to tax the man behind the tree. It enjoys strong populist appeal. The general public’s perception is that it collects revenues from wealthy businesses that can afford to shoulder significant burdens. Survey data show strong support for the notion that corporations should pay their “fair share” of taxes, a sentiment with which 70 percent of Americans agree. At the same time, a majority also believe corporations fail to fulfill that obligation.

It’s easy to see why. Because it is assessed at an institutional level, the corporate income tax indulges the fiction that revenue is extracted from a nameless, faceless entity, rather than from individuals, many of whom are not wealthy. Its structure obscures the fact that the corporate income tax is just an attenuated form of individual taxation.

Every dollar of government revenue raised by the corporate income tax ultimately is paid by one of three groups of individuals: employees, customers or shareholders. The tax also poses huge compliance costs and distortions, all to raise a relatively paltry amount of revenue. These factors should call into question the wisdom of taxing corporate profits at all.

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