If Washington tackles corporate tax reform in the next year, as many expect, one thing is for sure: this debate will touch off a feeding frenzy for lobbyists, an avalanche of strategic campaign donations and, in the end, probably will yield only modest reform. Nor can we count on any increase in overall revenues, given that the GOP is dead set against revenue increases and Obama has already given up the fight by saying corporate tax reform should be revenue neutral.
So here's an idea to ponder: Instead of fixing the corporate tax code, maybe we should just get rid of it?
Don't get me wrong: I'm all for raising taxes on the wealthy, as I have written here many times. But the corporate income tax is not the best way to achieve this goal. In the current system, we have low tax rates on capital gains and dividend income, along with rampant corporate tax avoidance. Which means that much of the wealth generated by corporations escapes taxation and then, when it is passed to individuals, it is taxed at a low rate.
Sure, we could try to fix this problem by closing loopholes and hiring more IRS agents. But this is likely to be a losing battle over the long run. Corporate lobbyists will keep chiseling new loopholes and hiring former IRS agents and top law talent to defend themselves from the U.S. Treasury, as General Electric and other companies now do.
The very existence of the corporate tax code is a major reason so much money flows into campaign donations and K Street lobbying firms. The whole system invites political corruption and crony capitalism.
At some basic level, too, the corporate income tax doesn't make much sense. If all wealth eventually ends up in the hands of individuals, why not just tax individuals? To be sure, there are some very smart ways to tax business, and we are big fans here of a financial speculation tax -- which could raise serious money. But in general reformers should be fighting for a tax system that is as simplified as possible, makes tax avoidance very difficult, rewards both wealth creation and work equally, and promises to raise significantly more revenues in the future than the government now brings in (as I have argued here).
Even an improved corporate income tax is not an essential part of the above picture. Quite apart from the complexity of business taxes, the ease of avoidance, and the inherent risks of political corruption, another problem with taxing businesses is that it creates obstacles to wealth creation. We should make it as easy as possible for businesses to make money and then as hard as possible for individuals to not pay steep progressive taxes on the wealth created through business.
The federal corporate income tax now brings in a few hundred billions dollars a year, or about a tenth of all government revenues. It's easy to imagine how that revenue could be replaced: by raising individual rates, taxing all capital income like regular income, raising the estate tax to where it was in earlier times, limiting individual tax breaks for high-earners, imposing a carbon tax, and enacting a financial speculation tax.
Should we eliminate the corporate income tax? Just maybe.