Posted by Bob Lord
In the wake of the Senate hearings on Apple's tax shenanigans, a gaggle of opinion writers, including left-leaning Ezra Klein of the Washington Post, are urging the elimination of the corporate income tax altogether, with increased taxes on dividends and capital gains to replace the lost revenue. You can find Ezra's piece here and two others here and here.
Although these people raise valid points in their criticism of the corporate income tax, they’re seemingly ignoring two huge coutervailing considerations:
First, as I've been reporting in a series at inequality.org,, much of our wealth is now held in massive tax-exempt pools, which are not subject to current taxation on dividend and capital gain income. Citizens for Tax Justice found that two-thirds of dividends flow to tax-exempt organizations. And if two-thirds of dividends go to tax-exempt organizations, two-thirds of capital gains on corporate stock sales also do. So, we can't just "tax the income at the shareholder level instead."
Second, the elimination of the corporate income tax would not be limited to publicly traded multinationals. Small businesses also would not be subject to corporate level income tax. If we stop taxing corporate income, many small business owners will use their wholly owned corporations as giant tax deferral machines. We have rules to stop that for doctors and lawyers, but not for most others. Currently, the great majority of small businesses operate as S corporations or LLCs, which pass their income through to their owners. But, if we eliminate the corporate level income tax, all those LLCs and S Corporations currently generating income taxable at the owner level would convert overnight to traditional "C" corporations and begin retaining their untaxed income inside those corporations. The revenue loss would be massive.
These proposals demonstrate how badly people supposedly in the know just don't get it. Wherever you turn, we are allowing massive amounts of wealth generated income to escape taxation, thereby driving us to ever greater concentrations of wealth and ever worsening levels of inequality. We can't solve that problem by exempting multinational corporations from income tax.