Marsh Business Advisors, LLC
"CAPITAL"
Businesses Don't Pay Taxes, So Why Tax Them?
By: Stuart Wm. Marsh
President, Genesee Capital, Inc.
May 24, 1996
For individuals, the tax-filing season is definitely over. But the tax-paying season is just barely over. The average American worker must work until May 6 each year in order to pay all of his or her state and federal income taxes. We work two hours and 47 minutes of every eight-hour workday just to pay the taxes on our earnings.
While this is a staggering proportion of our income, individual income taxes provide only 39 percent of the federal government's revenue.
Obviously, the remaining 61 percent comes from corporations, right? Wrong.
Social Security and payroll taxes provide 33 percent; excise taxes and other sources, 8 percent; borrowing, 9 percent; and corporate income taxes the remaining 11 percent.
The corporate income tax produces only a modest proportion of the federal government's revenues, but its existence creates tremendous economic inefficiencies and the opportunity for political corruption. So, a simple proposal: Eliminate all income taxes on corporations.
There are many arguments in favor of this proposal. Here are just a few:
Corporations do not truly pay taxes, so taxing them is costly, inefficient and a waste of resources.
The prime beneficiary of eliminating corporate income taxes will not be corporations, but the average American worker and consumer.
Taxes on wages are a major source of the government's revenues. Corporate income taxes increase the cost of doing business, thereby decreasing job creation.
The existence of the corporate income tax creates opportunities for political corruption; the elimination of the corporate income tax will provide significant political campaign reform.
The statement that corporations don't pay taxes may come as a complete shock to the army of controllers and accountants that spend most of their working lives dealing with corporate income taxes (and how to avoid them), but it is true.
Lester Thurow, a liberal economist at the Massachusetts Institute of Technology, writes in his book, "The Zero-Sum Society'': "While corporations are legal entities that write checks to government, they do not pay taxes. They simply collect money from someone - their shareholders, their customers or their employees - and transfer it to the government.''
Astute corporate managers figure out how much after-tax profits their firm has to earn in order to satisfy its shareholders. Corporate income taxes are treated just like every other cost of doing business, and are passed on to somebody else.
Shareholders pay in the form of lower stock prices and dividends. Customers pay in the form of higher product prices. Employees pay in the form of lower wages.
The argument against the elimination of the corporate income tax is that greedy corporations would simply keep this "extra'' money for their sole benefit. This is absurd.
Shareholders would immediately demand that this "extra'' money be used efficiently, either in the form of higher dividends (which would increase shareholders' income) or further investment in the company (which should increase the stock price). If the corporation refused, the shareholders would sell their shares and buy the shares of some other corporation that will pay higher dividends.
Employees would immediately demand that this "extra'' money be used to pay higher wages. If the corporation refused, the employees would quit their jobs and seek employment at some other corporation that will pay higher wages.
Customers would immediately demand that this "extra'' money be used to reduce the cost of the products they buy. If the corporation refused, the customers would discontinue the relationship and buy from some other corporation that will offer lower prices. These price reductions will ultimately reach the consumer.
Many global competitors have an advantage over American corporations in that they can pay lower wages or do not have to contend with crippling regulations. Eliminating taxes on corporate income would enable U.S. firms to compete more aggressively overseas, which would lead to greater job creation at home.
How will eliminating the corporate income tax help the average American worker (other than by lowering the prices of the products they buy; increasing capital investment, which leads to job creation; and providing for higher wages)?
By eliminating tax breaks and loopholes that benefit a very select few at the expense of many.
Take political contributions.
The Archer Daniels Midland Co. and its chairman have contributed heavily to Bob Dole over the years. The Senate Majority leader has sponsored several pieces of legislation that, through tax breaks, encourage the use of ethanol. Ethanol is made from corn, which grows in abundance in Sen. Dole's home state. And the biggest producer of ethanol in the United States is (drum roll, please): the Archer Daniels Midland Co.
Corporations contribute to politicians like they make any other investment: in anticipation of a return.
In order to get elected or re-elected, politicians raise campaign money from corporations, with the payoff down the road in the form of favorable tax treatment or legislation. If corporations do not pay taxes, they will have no incentive to finance politicians because politicians will be unable to deliver any tax breaks.
The elimination of the corporate income tax will wipe out much of the "corporate welfare'' that is purchased by firms that can afford it at the expense of those that can't.
While it feels good to fool ourselves by thinking that we can enjoy the benefits the government provides while letting someone else (like corporations) pay for them, remember this: There are only two people in the entire world that pay for everything: You the Consumer, and You the Taxpayer.