Sunday, February 10, 2008

The Corporate Tax - The Most Regressive Tax in America

Most people I know debate whether taxing a corporation more is good or bad, or whether giving corporations tax breaks is good or bad. Corporations pay very high tax rates. The fact is that taxing corporations at all is bad for everyone.

What is a corporation, after all? A corporation is an entity funded by investors and lenders, run by managers in charge of creating a profit for the investors and repaying the lenders by creating a product or providing a service for a group of consumers. In a legal sense, a corporation is a distinct entity, but in a practical sense it is a group of people. It is also an employer of people in most cases.

What effect does taxing a corporation have on the economy? First, it reduces the capacity of that corporation to employ people because of the reduction of funds. It also reduces the ability of that corporation to research new products or improve existing ones. Worst of all, it forces the corporation to raise prices to compensate for the reduced revenue. What happens when fewer people are employed, less product development occurs, and prices rise? It hurts the poor, and creates more poverty. Those with less income are less able to afford basic goods and services, and with fewer people employed there are more people who have less income.

So, in short, a tax on corporations is the most regressive tax around. A regressive tax is one that taxes the poor more than the wealthy. Another example with be any form of sales tax not refunded or reduced for the poor. Corporate taxes have the same effect because they create inflation through the ideas mentioned above, which is just one more reason they should be unilaterally repealled and the FairTax should be adopted. By taking the inflation out of the market, taxes can be paid in a smarter way while more jobs become available, more research is done, and prices go down for everyone. The FairTax represents a win-win that both political parties should be falling over themselves to pass.


le35 said...

You make a good point, Rob. Corporations aren't just big companies. They're groups of people doing jobs and creating more jobs for more people. Most corporations started as a small business that grew. Any small business owner should decide that corporate taxes are bad too because it puts a cap on how much their businesses can grow without having to pay taxes twice.

Robert said...

One reason many small business avoid growing too large is because of the tremendous cost of doing so when they cease to be considered an S Corporation for tax purposes. Imagine how much more this country could achieve if we took out such dissincentives and instead encourage people and businesses to do better for themselves.

Kady said...

Corporate tax exists for the same reason that income tax exists - because it is a practical point at which the government can get the revenue (compared, e.g., to capital gains tax, which relies on SHs to report annually and is hard to police). It is hardly the MOST regressive tax in America though.

I would be find w/ eliminating corporate tax if we could find a way to properly implement a wealth tax. My past suggestion has been a yearly withholding of all shares held, but haven't thought out the logistics.

Also, the LLC structure gets rid of corporate tax (it is a pass through structure) and most newly formed corporations are LLCs. From what I understand, the only reason that many corporations haven't converted to LLC is b/c the process is too costly. This obviously puts older companies at a disadvantage compared to newly formed LLCs.

Anonymous said...

Corporate tax rates are one thing... the number of corporations that actually pay these rates is another. Also, if corporate entities use civil infrastructure like courts, roadways, police, etc. then why should they not pay taxes. In a zero sum game (or close to it) if corporate taxes go down then all non-corporate taxes go up. Anyone want to raise the capital gains rate to 60% ? and you can't tax the bottom 75% of the population more... they're tapped out.
- anon