Opinion: Want fair taxes? End the corporate income tax system
Let’s take a look at how corporate taxes work using a simple example of selling a can of beer.
If I purchase the beer for $1 and if it cost the company 90 cents to produce and distribute it, then the company has made a 10-cent profit. If the federal corporate tax rate is 20%, for example, then the corporate income tax paid on the profit would be two cents. But I paid the dollar for the beer. So, the company simply took my money and gave it to the government. So it should be clear that corporations don’t pay taxes, people do.
This is important because politicians and others are always arguing over whether to increase or decrease taxes, including corporate income taxes. And, now, the Biden administration is leading a proposal for a global minimum 15% corporate income tax.
Forget for the moment that getting all the countries around the world to pass similar legislation will be nearly impossible. The real problem is that the proposal is actually going in the wrong direction from a fairness perspective, because corporate income taxes are actually regressive for poor people.
Why? Because poorer people spend most of their money buying things that they consume — like food, cars, houses, televisions, etc. So, because most corporate income taxes are pass-through taxes actually paid by consumers, then a corporate tax is essentially a consumption tax.
And a consumption tax on those who spend all their money consuming things they need (as opposed to wealthier people who are able to save and invest much of their money) means that poorer people are essentially being charged for the corporate income tax on 100% of their personal income, whereas wealthier people are being charged for that tax on less than 100% of their personal income.
In addition to being regressive, a corporate income tax system is a fraud on all individual taxpayers because it essentially hides the true cost of running the government. Telling individual taxpayers that they pay a certain income tax rate (for example, 30%) when they really pay much more would be illegal in the world of private finance.
The solution is not to have corporations pay their “fair share” of taxes or to have a national or global minimum tax. The fair and transparent approach would be to eliminate corporate income taxation altogether.
Of course, our personal tax rates would need to increase so that the government can fund itself with the same amount of revenues. But given that we are already paying the corporate income taxes through purchases, we would then know how much in total taxes we are paying in return for the benefit that we are getting from government spending.
There would be a multitude of other benefits from terminating the corporate income tax system. It would eliminate the part of the lobbying industry that advocates for rigging the corporate tax system in favor of one or another industry or company. It would help end the “race to the bottom” competition for corporate relocations because governments would no longer have corporate income tax holidays to give away.
It would force governments to instead think longer term and create positive business environments with skilled workers, quality-of-life attractions, sustainable careers and lifestyles, etc. Our elected officials could spend less time on corporate tax laws and allow them to focus on other issues that bring more benefits to their constituents.
It would end the misleading debates on corporate tax policies, especially during election periods. Tax agencies could focus more on the tax returns of individuals. And it will save businesses money because they won’t need to hire tax professionals to prepare endlessly complicated corporate tax returns.
Of course there are other issues to take into account, such as cross-border cash flows of dividends and interest payments to make sure that the ultimate individual recipients pay their relevant taxes. But they can be dealt with through withholding processes that we already have in place for similar transfers.
Reforming the corporate tax would mean a real reckoning for how much taxes we are actually paying, and how we will need to increase our personal income tax rates to reflect that reality. Politicians will not like it because they will lose a divisive issue on which they can raise campaign funds.
But the elimination of the corporate tax is the first step toward an actually fair and transparent tax system.
Donald Moore is a lawyer and investor in the global security, transportation and infrastructure sectors and an assistant adjunct professor the University of Michigan School of Law.