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Three Reasons Why Killing the Corporate Income Tax Is a Terrible Idea

May 24, 2013 at 12:23 PM

Bloomberg’s Evan Soltas suggests eliminating the corporate income tax.  It’s a terrible idea that would:

  • Create a huge incentive for individuals to shelter income by setting up a company to sell their services tax-free. For example, a chef at a restaurant could try to turn her salary from taxable individual income into tax-free corporate income by setting up a one-person cooking company and having the restaurant pay it rather than her.
  • Blow out the deficit. The corporate income tax will bring in $4.8 trillion between 2014 and 2023, the Congressional Budget Office (CBO) estimates.  Eliminating the tax would cost much more than that because of all the sheltering activity that it would allow (see above), which would reduce personal income tax revenues.

    Soltas mentions that a carbon tax or value-added tax (VAT) could help fill the revenue hole.  But, given the need to reduce long-run deficits, eliminating the corporate income tax is hardly a good priority for any revenues that such policies would generate.

  • Be regressive. The corporate income tax is one of the most progressive parts of the tax code, so eliminating it would give the wealthy a big new tax cut.  Some argue that a large share of the tax falls not on corporate shareholders (who tend to be high-income) but on workers (who tend to have more modest incomes), in the form of lower pay and higher prices.  But, based on the latest evidence, the Urban-Brookings Tax Policy Center finds that the bulk of the tax falls on the wealthy: the top 1 percent of filers bear more than half of the tax.

    Moreover, two a replacement for the corporate income tax that Soltas suggests — a carbon tax and VAT — is generally regressive, so the net result would be to shift tax burdens to low- and moderate-income people in order to cut taxes for the wealthiest.

Soltas also notes that we could replace the corporate income tax with higher taxes on individuals’ investment income, like dividends and capital gains.  But, that would give individuals a bigger incentive to delay those taxes for as long as possible by hoarding income in corporations or accumulating capital gains on corporate stock indefinitely.

Despite news stories about corporations running circles around the IRS, the truth is that the corporate income tax helps prevent cheating.  A public company may have thousands of shareholders; the tax aims to help ensure that all of them pay at least some tax on their corporate income.  While the corporate income tax could certainly be improved (see our six tests for corporate tax reform), it nonetheless plays an important role in fulfilling the tax system’s basic goal — raising revenue fairly and efficiently — while also reducing income inequality.


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