Should We Reduce the Corporate Income Tax?

President Obama has opened an election-year debate on corporate taxation with his proposal to reduce the headline corporate income tax rate from 35% to 28%.  His idea is to give corporations an income tax cut while at the same time eliminating massive loopholes that corporations use to avoid paying taxes at all.

A corporate income tax with fewer loopholes would be a great thing.  Loopholes distort corporate behavior by encouraging them to behave in non-productive ways simply to reduce their tax bills.  Three cheers.

But why the reduction in the headline rate?  How much should corporations pay in taxes?

Well in Australia (where I live) the headline corporate income tax rate is 30%.  In Australia, there are essentially no loopholes or special provisions.  As a result, the effective corporate income tax rate is . . . 30%.

In the United States, the headline corporate income tax rate is 35%.  In the US, there are hundreds of loopholes and special provisions.  As a result, the effective corporate income tax rate is under 15%.

By the way, in Australia the unemployment rate is 5.1% and the minimum wage is over well over 20 US Dollars per hour.  And did I mention that everyone has government-sponsored health insurance?

[pullquote]The corporate income tax is a tax on profits, not revenues.  Investment is deducted before profits are determined.  When a corporation invests in innovation, that money isn’t taxed.[/pullquote]

Ah, but a high corporate tax rate will stifle innovation and investment — or so the story goes.  Let’s think about this a moment.

The corporate income tax is a tax on profits, not revenues.  Investment is deducted before profits are determined.  When a corporation invests in innovation, that money isn’t taxed.  It’s expensed against revenues to determine profits.

No dice.

No, what a high corporate income tax does is reduce the proportion of its profits that a corporation can pay out to shareholders, give to CEOs in massive bonuses, or use to buy up other companies.

What are the least productive, most damaging things that corporations do?  Pay out to shareholders, give to CEOs massive bonuses, and buy up other companies.

A high corporate income tax is sounding better all the time.

The real question, though, is not whether or not we should tax corporate income.  The government needs money to run, and we have to tax someone.  The real question is: what is the best way to use the nation’s resources?

To keep corporate income taxes low, either we have to keep individual income taxes high or we have to cut back on government services.  In other words, it’s corporations versus people.  In the grand scheme of things, I suspect that you and I need the money more than Apple or Google.

That’s not class warfare.  That’s simple arithmetic.

Yes, a high corporate income tax is sounding better all the time.