The Corporate Tax Fairy Taxes You

But, Keep Asking For Businesses to Pay Their Fair Share

People don’t understand how the US tax system works. If they did, they would be all in favor of a straight consumption tax. You are taxed directly, and indirectly, in so many ways that if this were a boxing match it would be a TKO in the first minute.

Years ago, I was having breakfast with my friend Yra Harris and some others. Yra remarked how corporations “aggregate” taxes. They don’t pay them. We started talking about it. At the time, CME was a non-profit member-run organization changing to a for-profit corporate structure. We were trying to understand what the cash flows would look like.

Here is the too long don’t read part: Every time a politician raises any tax on a company, the company doesn’t pay them. Consumers do. It is an indirect tax on citizens.

The corollary to this is every time the government increases or creates new regulation that raises the costs of doing business, citizens pay the costs, not the company.

People not only do not understand how their own tax system operates, but they do not understand cash flows. Phil Gramm and Mike Solon wrote about this the other day in the WSJ. They say,

Most economic studies conclude that 50% to 70% of a corporate tax increase not passed on in higher prices is borne by workers, while investors bear 30% to 50%.

Our friends in Washington DC have been doing a lot of crowing about raising corporate taxes, dividend taxes, and corporate stock buyback taxes. They are really for raising taxes on everyone, not just the “rich”.

Corporate taxes hit the middle and lower earners of America the most! They don’t leave a scratch on the company. When America raises corporate taxes, companies move operations overseas to less tax-happy countries. The “Double Irish” isn’t a drink.

Corporate profits are taxed several times. How is this possible?

1. Corporations pay taxes on their profits. The “corporate tax”. This is passed on to consumers. The companies raise prices to cover the tax. They pay workers less than they would because of the tax. Guess what Biden’s proposed corporate tax increase would do?

2. Shareholders pay taxes on dividends issued by companies. After paying their corporate tax money might be left over. If the company decides to pay equity shareholders a dividend, the shareholders pay tax on that dividend. That is the second tax.

3. Consumers and Shareholders pay taxes on stock buybacks After paying their corporate tax money might be left over. If the company decides to buy back stock, see point number 1. It aggregates the tax and consumers pay or workers make less. That is also a second tax.

4. Non-qualifying dividends and short-term capital gains are taxed as ordinary income at current rates of up to 40.8 percent If you buy and sell a stock in the same year, you pay ordinary income rates on the profit. Some dividends issued by corporations do not fall into the normal dividend category and are taxed at ordinary income rates.

Milton Friedman was correct. The most efficient corporate tax is 0%. The most efficient capital gains tax is 0%. Corporations spend thousands of hours and millions of dollars figuring out ways to avoid taxation. It is money and time better spent on innovation.

With that tax scheme, we would see worker pay rise. We would see more onshoring of companies and new companies start. It would be great for lower and middle-income earners. Especially given the threat of new technology like Artificial Intelligence to their jobs.

The US doesn’t collect very much in corporate tax revenue, and spends quite a bit of time and effort collecting it. Biden’s new proposal is riddled with subsidies and special interests. When you have a straight consumption tax, all those subsidies and special interests go away.