Report: Why We Need to Tax Corporations Now, More Than Ever

Yves here. For a fiat currency issuer like the US federal government, taxes do not fund spending but serves other important purposes, like regulating economic activity. For instance, deficits are generally necessary to make up for systematic private sector underinvestment. Taxes serve to provide incentives (depreciation tax shields to encourage investment) and disincentives (“sin” taxes). This article debunks many of the arguments used to claim that taxing companies at a lower rate is desirable.

Originally published at the Tax Justice Network

Last year we published a document entitled Ten Reasons to Defend the Corporate Income Tax, outlining how the tax is under constant attack, in country after country, and explaining why it is one of the most precious of all taxes. Now there’s another fascinating paper, rich in insight and detail, from US economist Kimberly Clausing, entitled “Strengthening the Indispensible U.S. Corporate Tax.

While US-focused, it contains a lot of material that provides extensive further support for our own generic document, and argues that the corporate income tax is becoming more, rather than less, important in our tax system(s). It also argues that tax rates for capital, which is currently taxed at lower rates than labour is, should be harmonised with the labour rate, and supports so-called ‘formulary apportionment‘ approaches to taxing U.S. corporations internationally.

We’ll start by highlighting a graph:

us-taxable

What’s the significance of this graph?

Well, one of the commonest lines of attack against the corporate income tax is a sensible-sounding argument that goes like this: investors in corporations receive dividends from corporate profits, and they pay taxes on those profits. So why not just tax the investors directly, the argument goes — instead of taxing the corporation itself?

Like many sensible-sounding arguments, it falls apart under examination. This graph makes clear: only around a quarter of the owners of US corporate stock are taxable on those dividends. So not taxing corporations would be a massive handout.  There’s no particular reason why a similar pattern or worse wouldn’t be encountered in other countries: generally speaking, in smaller countries foreigners tend to own a larger share of equities.  Take the United Kingdom, for instance, where well over half of the UK stock market is owned by foreigners.

Figure 1: Beneficial ownership of quoted shares in UK domiciled companies

uk-equities

 

So for this reason alone, the problem of locally untaxed corporate income in other many countries might be starker still.

Not only that, but as Clausing reminds us, the corporate tax serves as an essential backstop for the income tax: if you abolish the corporate tax, rich folk will reclassify their income as corporate income, so as to attract the zero-tax rate.  And as we’ve just reminded readers, the income taxes paid by wealthy folk have powerful impacts on inequality, between income groups and between the sexes.

As mentioned, the new Clausing paper is rich in analysis and detail, and will be an important resource, relevant for many countries. It concludes:

“The U.S. corporate tax has a vital role to play in the U.S. tax system. It is one of our only tools for taxing capital income, since most corporate income is untaxed at the individual level. The corporate tax is an important source of revenue and it also has a vital role in protecting the personal income tax system. Recent economic theory buttresses the case for taxing capital on efficiency grounds. The corporate tax is also an important part of the progressivity of the tax system, since a majority of the tax falls on capital or on rents.

In this regard, the role of the corporate tax has become more important, since capital income has become a larger share of GDP in recent decades, and capital income is far more concentrated than labor income.

In sum, the case for a healthy corporate tax is alive and well. The remaining question is whether the requisite political will can be summoned to reform and strengthen our corporate tax system.”

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63 comments

  1. MikeNY

    But the flip side of the argument is that you’d also be taxing investors on their foreign stock income, no? Surely most big investors have sizeable foreign company holdings.

    The argument about reclassifying personal income to corporate income makes sense at first read, but I’d think there must be some way to try to stop this, such as tightening rules as to what constitutes a corporation for tax purposes.

    I’m not convinced that eliminating the corporate tax is a great idea, but I’m also not convinced that there aren’t other ways to get at the income. Certainly the current Swiss cheese corporate tax treatment isn’t optimal, except for Apple and GE and such, for whom it’s already close to zero.

    1. Marc

      US Corporations should be taxed on their retained earnings after paying out dividends; dividends should be taxed on the recipients. Foreigners are not a ;problem, because all shareholders must register their soc sec numbers with the corporation, and in the case of foreigners the corresponding tax would be withheld by the corporation and paid directly to the IRS. If the foreigner is somehow entitled to a refund, he could file a US return for it. And yes, there would be somewhat less tax this way because it eliminates the double tax, but this way has the advantage of being consistent and fair. US corporations, like US citizens, should be taxed on their worldwide income, with credit given to taxes paid to the foreign company. This would eliminate the issue of repatriating earnings later in the hope of a lower tax rate later. Foreign corporations, either bona fide foreign or inversions, are a harder problem. Maybe if a company sells into the US market, that company would be required to file a tax return, and the US tax would apply to its gross profits where the US portion of the profit would correspond to the proportion of the total sales that were made in the US. Foreign corporations would presumably get credit in their home country for taxes paid to the US.

      1. The Heretic

        It is corporations that require the hard and soft goods and services that are produced by a government such as infrastructure, law enforcement, and regulation; hence corporations should pay for their services through a tax on all earnings… I would also argue for a straight tax on all revenue, as it is revenue generated by a corporation that is representative of its economic activity within a nation

        1. The Heretic

          All nations need to restrain the influence and wealth of the super rich and powerful, to prevent them from easily ‘choking off’ smaller competition.
          Taxes are one simple way of doing it.

    2. MikeNY

      I should have added that I am convinced that i) allowing corporations like GE and Apple the current Swiss cheese tax regime, and ii) giving preferential low-tax treatment to dividends and capital gains, is the best of all possible worlds for oligarchs. I believe that dividends and cap gains should be taxed as ordinary income at progressive rates.

      1. steelhead23

        Why should those who labor for income pay a higher income tax rate than those who invest for income? Mike, I think you are going in the right direction, but in face, I believe it would be more equitable to actually charge a higher tax rate for investment income (capital gains) than for labor income (with a fairly high deductible to shelter retirement income). That is, I would turn the tax code upside down – Warren Buffet should pay a higher tax rate than his secretary. But this cannot happen until we take back the U.S. government from the investment class by overturning the Citizens United decision.

        1. MikeNY

          Interesting point about working with your hands as opposed to living off rents. It’s a moral question, and I think e.g. Gandhi would agree with you. But doesn’t someone like Jeff Koons or Lucian Freud “work with their hands”? They sell their work for millions… What about farmers, or musicians? Lots of complicating questions.

          I’d settle for an income tax code that treated all income equally and taxed it at progressively higher rates. However, I see the legitimacy of the issue you raise.

          1. Banana Breakfast

            In practice, I don’t think it much matters. The kind of rent extractors we’re talking about who “deserve” to be taxed at a higher rate will almost always fall into higher income tax brackets in an all-income-equal system anyway.

    3. Robert Hahl

      “But the flip side of the argument is that you’d also be taxing investors on their foreign stock income, no?” Yes, but what is wrong with that?

    4. Kathryn M Tominey

      Mike – if you pay taxes on foreign revenue in a foreign country you can deduct those taxes paid as an “income tax credit” from taxes due here. You do not have to repatriate those profits and pay taxes here. How do you think GE, Boeing, etc. wind up paying zero taxes here.

  2. Jon

    The more common argument that I hear from conservatives/etc is that corporate taxes don’t work, because they just pass the costs of the tax on to their customers. What is the best logic to smack them down when they try to argue that?

    1. Ranger Rick

      It’s pretty simple actually. They can’t pass the costs of the tax on to their customers because it would increase the market price of their goods and services, decreasing sales.

      1. Arthur J

        Why on Earth would you say they don’t pass on the cost ? Of course they do. There are only two possibilities, they accept a reduced profit-margin or they pass on the cost. A simple example of this passing on is the grocery shrink ray. Sure they don’t actually raise the price all the time, they just reduce the quantity you get for the same price. A price increase by any other name.

        Corporations don’t have money, people do. If you tax a corporation then they must collect it from their customers, because that’s where they get their income. Except the banks I guess; the Fed just gives them their money.

        1. jsn

          Antitrust law was once used to ensure that corporations actually competed, no longer. Most consumer goods prices are set by the corporations that produce them to what customers will pay, but in the absence of real competition. The delta between what their customers can bear and the lesser sum customers would pay for a truly competitive product is pure rent.

          If there were competition, when manufacturers shrank the size of their candy bar, or chips bag or tooth paste, consumers could switch to another product. Have you noticed that they all shrink at more or less the same time? What’s up with that?

          Markets are only efficient when someone forces them to be that way and the the logic of the Neoliberal market utopia, that markets are always right and “interference” is always wrong conserves any pricing advantage any market incumbent can build through any scam or swindle that goes unprosecuted.

          The way a competitive capitalist would absorb the cost of a tax rather than pass it on to customers is by actually innovating which would require real investment rather than the financialized rent extraction that goes by that name today.

        2. SomeCallMeTim

          Is the Econ 101 response that the burden of a tax will be borne by the buyer and the seller, according to their respective elasticities, just another homus economicus oversimplification?

          1. pespi

            When corporations don’t pay taxes, the entities that rely on tax revenue to survive, like states and cities, slowly crumble, and things get worse for everyone. Profits are at a record level, there would be no dire impetus to raise prices.

            That’s a reason why states and cities should be funded federally instead of being set up to fail whenever there’s an economic downturn, for some shock doctrine, but that’s another topic!

        3. pretzelattack

          but their income isn’t fixed, corporations (and the us) got along fine when some corporations didn’t have more money than countries. they can just cut ceo salaries, for example, which have grown exponentially. if they downsize the portions enough, people won’t buy their products.

      2. Jim A

        You have to look at the flip side. Arguing that they’ll just pass on the costs is arguing that they WON’T just charge higher prices if they don’t have to pay out the taxes. Yes, the consumer ultimately pays the tax. But if we have learned nothing from the epi-pen fiasco it is that prices are not constrained by costs.

    2. paul

      So why do they complain so much?

      When did their customers start to matter to them?
      When did their customer’s welfare start troubling them?

    3. Nicholas Shaxson

      It *could* be paid by workers, by consumers, or by shareholders, or a mixture of these. Different countries, industries will see a different mix.
      Citizens for Tax Justice summarise it nicely: “ Most, if not all, of the corporate income tax is borne by shareholders in the form of reduced stock dividends, and high-income Americans receive the lion’s share of these dividends.” And take a look at all the evidence here. http://www.taxjustice.net/2016/02/25/the-great-tax-incidence-hoax/ .

  3. Jon Claerbout

    Maybe the trick is to be able to tax foreign producers as you are taxing local producers. The question seems thus linked with choosing tariffs.

  4. Jim Haygood

    ‘So not taxing corporations would be a massive handout.’

    Logic of the gov-lover: if I choose not to pick your pocket, then I am your benefactor and a philanthropist to boot.

    ‘If you abolish the corporate tax, rich folk will reclassify their income as corporate income, so as to attract the zero-tax rate.’

    One is reminded of crude pitches from the back pages of pulp magazines which used to tout, “Incorporate yourself and pay zero taxes!”

    Whereas in fact, money taken out of a corporation in the form of either salary or dividends incurs personal tax. You can’t just “incorporate your way to tax freedom,” except in the fringe world of militias and the Tax Justice Network.

      1. MLS

        I have no problem ending the carried interest loophole, but it applies to partnerships, not corporations, so it’s not really relevant here.

        stock buybacks using borrowed money are done by publicly traded C-corps, as opposed to S-corps, which are privately held small businesses and sole proprietorships. To Jim’s point S-corps are pass-through entities meaning that anything that is taken out of the company is taxed at the individual level. So taxing a corporation at zero means a business owner would pay no taxes but would also have no income since the only way to preserve that zero rate is to leave it in the company!

        1. Robert Hahl

          The article was about C-corps, and the statement “If you abolish the corporate tax, rich folk will reclassify their income as corporate income, so as to attract the zero-tax rate” also applies to C-corps, which is why I mentioned stock buybacks.

          As for S-corps, I have never seen any small business declare a profit. They make a point to take it out of the firm as salary. As far as I can tell, the effective tax rate on small business is already zero.

          1. David

            Most scorps show a big profit and paltry salary as they can and minimize taxes….non public c corps you are right. If you take out the s&p 500 earnings it looks like all other c corps lose money

    1. Paul Tioxon

      Newsflash, incorporation increases the odds of not paying any corporate taxes according to GAO report. How do they do it? They lose money. How do they stay in business, well citizen, they lose on each item they sell but they make it up with volume. No, just kidding, capitalism is structurally corrupt, works tongue and groove with the state and codifies economic entitlements to preserve privileged positions in the rigged capitalist market. You know, capitalist pig is not mean name calling when it’s just the simple truth of the people hogging everything up for themselves.
      ————————————————————————————-

      AEI shows how 70% of corporations avoid all corporate taxes and stay in business by losing money. Who Knew? They are really non-profit charities and HAVE been doing god’s work by employing the great unwashed and just not making a dime for all of their good works.

      https://www.aei.org/publication/why-70-of-companies-paid-zero-in-corporate-taxes-they-had-zero-profits/

      “Two claims from the recently released Government Accountability Office (GAO) report on corporate income taxes are receiving widespread attention in the media. The first is that in 2012, 70% of all active companies paid zero corporate taxes and 20% of “profitable” companies had no tax liability. The second is that the effective tax rate for large profitable corporations amounted to about 16% of their “pre-tax income.” As it turns out, a closer look at the underlying IRS tax data shows that these claims rely heavily on how we define “profitable” and “pre-tax income.” Here’s why.”

      ————————————————————————————–

      Thanks AEI for splaining this stuff to me cuz me Bizzarro and love being stoopid and love money losing, tax avoiding businesses that some how operate and not disappear into chapt 7 or 11 or 13 bankruptcy. Bizzarro corporations, they lose money, stay in business and avoid taxes. What a country!!

    2. Plenue

      “Logic of the gov-lover”

      As opposed to what? A corporate bootlicker who doesn’t think such a thing as a social contract exists? They’re freaking corporations; at the end of the day they’ll still be fabulously wealthy.

      Hell, since you apparently don’t believe MMT actually exists, I presume you think taxes DO fund spending, in which case by all means we should tax them more, so the government has money to spend.

    3. Nicholas Shaxson

      . . . unless you’re tax exempt on that. which, as the graph shows, is a big part of the game

      I also think that Yves is probably right, up to a point, re the ‘taxes don’t fund spending’ thing, but it’s also true that governments behave as if taxes fund spending (deficit hysteria, anyone?) so taxes are in practice a constraint on spending.

  5. rps

    You can’t just “incorporate your way to tax freedom,” except in the fringe world of militias and the Tax Justice Network.

    Sure you can. They’re called NPO’s

  6. Jeremy Grimm

    Corporations have become highly concentrated. Sector by sector of Industry is dominated by fewer than five large enterprises — Corporations and entities like Cargill. These large enterprises operate as actual and de facto monopolies extracting exorbitant monopoly rents. [I definitely need to study Michael Hudson’s book “Killing the Host” more closely and actually finish reading it!] As I recall Michael Hudson argues for taxing away monopoly rents. [I don’t remember the why well enough so I’ll wing it.] This removes them from the Industry component of aggregate spending and makes them available to correct for some of the imbalances of the monopolies.

    Take Pharma for example — taxing away the huge monopoly profits they gouge removes monies which fed stock buy-backs, funded executive plunder, and paid stock appreciation and dividends to shareholders. The monopoly profits become available as a component of government aggregate demand. The government can use that demand to pay for drugs the public needs and also make demand available to support the research into basic science and applied science to discover and develop new drugs and a new and better understanding of the deeper mechanisms of life and chemistry.

    I think there is another very good reason to increase Corporate taxes and taxes on the wealthy in general. I don’t especially like the way some people get a disproportionate share of the good things in life while making others suffer unnecessarily but I also don’t like the idea of calling everyone “comrade” or “citizen” or what have you. Be that as it may — one person can only consume so much in one lifetime. Our wealthy and our Corporations have taken far more of the wealth and income than they can possibly consume living a good life however that might be at least somewhat reasonably defined. The remainder of wealth and income after paying for their living their good life has been channeled into consolidating and exercising Power and Control over the rest of society. That extra funding Power and Control must be taxed away or we will have neither Democracy nor a “free market” in the sense of non-neoliberal notions of what constitutes a “free market”.

    1. MikeNY

      I am sympathetic to the argument that taxing corporations would lessen their political power and oligarchic / monopolistic proclivities. The question I have is whether this might be done better by taking the money out of politics (i.e., by repealing Citizens United and by enacting comprehensive campaign finance reform.)

      Or maybe the answer is “both”.

      1. Carla

        Actually, we need to do “both” AND.

        The AND is to pass a constitutional amendment that abolishes the legal fiction that a corporation is a “person” with constitutional rights. Corporations have privileges, granted to them by states in their charters. Only human beings can have inalienable rights.

        And for-profits, not-for-profits, unions and political parties are all corporate entities. Unlike We the People, none of them are sovereign.

        https://www.congress.gov/bill/114th-congress/house-joint-resolution/48

      2. Jeremy Grimm

        The answer has to be both and more besides. Monopoly rents distort the economy as well as our democracy. Monopolies crush small business and work to stifle innovation. Small businesses nibble their markets and innovations can make existing investments obsolete. The lust for Power and Control have grown to swamp economic concerns. The monopolies must be smashed to pieces and we need to erect trade barriers to protect our small industries from becoming vulnerable prey for Global Cartels.

        1. pretzelattack

          just a progression imo, there was certainly too much corporate influence in politics prior to that.

    2. Jeremy Grimm

      Though it’s slightly elliptical to the main question about taxing corporations I hope I may be forgiven for wondering what sort of “free market” we might construct that discards neoliberal nonsense and makes it possible for Entrepreneurs to do their building without creating the mind-boggling inequalities of Wealth, Power, and Control we suffer today. Most of the Entrepreneurs I’ve talked with– not a lot but more than a few — didn’t start their enterprise intent on becoming enormously wealthy. That’s not to say they didn’t hope to do better than most of us but they weren’t driven by a will-to-power or wealth. They had a will to build something and exercise control over it and over their own lives. Most of them had a particular regard for the welfare of their employees beyond that of ordinary human compassion. All of them were well aware of and acknowledged the importance of luck in their success. How did a nation of shopkeepers and small industry end up as neoliberal hell?

  7. Robert Hahl

    About ten years ago, after a Paul Krugman speech, I asked him from the audience to explain why it is that the Kennedy family fortune was estimated at $400 million in the early ’80’s, but now an individual can take home $400 million running IBM for a few years.

    His only response was and I quote, “Well,… It’s not funny money.” I assume he meant that it was not counterfeit, which was a rather nonsensical answer but understandable, since nobody ever seems to ask where is it all coming from. Under-taxation seems to be a big part of the answer.

  8. James McFadden

    Regarding whether corporations should pay taxes …

    Corporations are basically contracts between civil society and investors that provide investors with protections from liability in a market maintained by civil society. In any contract, or trade, there should be mutually beneficial results for both sides. Investors get protection from liability, access to civil society’s resources (courts, law and rule making and enforcing, infrastructure, educated workers, etc.), and currently a lower tax on unearned income (capital gains and dividends) – although the latter should not be the case. What does civil society get in return for all the benefits that are made available to corporations? There should be some level of costs levied on the corporation not only to reimburse civil society yearly for all the support services it provides, but also reimburse civil society for the risks that it has taken on to provide protection from liability. These costs should be extracted via taxes from corporations regardless of whether the corporation makes a profit – otherwise why should civil society provide those benefits. Corporations should pay a minimum tax on gross sales regardless of whether they make a profit since gross sales best reflects the general costs to a consumer society. Profits should also be taxed, at a higher rate, since profits reflect the net surplus value extracted from society for the services and protections that society provides the corporation. If profits can be recycled back into a corporation as an investment, a deduction without paying taxes, and thereby grow the value to the investors who pay no tax until they sell their stock, what yearly benefits accrue to civil society to repay the costs to civil society? These costs should be paid yearly otherwise this operates as a zero interest loan to corporations – civil society subsidizing corporate growth and thereby subsidizing investors. Why should corporations not “pay as you go” like the rest of us? What if the corporation goes bust and avoids paying any of the costs to society incurred over decades? What if it goes bust after creating a sweet heart deal with a foreign corporation to launder its profits? What about foreign corporate investors – foreign investors don’t pay local taxes to cover costs to civil society extracted by corporations. What about investments by IRAs or other tax-free entities? Why should they get a double-tax free ride from society? Corporate tax avoidance, basically failing to pay their fair share to reflect the costs to society, is compounded by a low “unearned income” tax on capital gains and dividends. So even if profits are distributed after years of an effective “zero interest loan” from civil society, the taxes are less than the general public pays. This is not equitable. It should be “pay as you go.” Corporations should be taxed on both net sales and on profits with no investment deduction. Investors should also be taxed on their “unearned income” at the same rate as “earned income.” Those who claim this is double taxing are ignoring the benefits from liability protection and from civil society infrastructure. If someone wants to avoid this “double-tax” then let them construct the business without the liability protection. A business need not be constructed as a corporation. Investors can construct a business and pay taxes as individual owners – but they won’t get the benefit of liability protections or lower tax rates on investment. If they want the protections, then they should pay their fair share of the costs incurred by civil society. It is a simple as that.

    1. kramer

      The anti-double taxation on investment income is a false argument anyway, since it is only the new income beyond the original investment that is taxed.

      Similarly, earlier in the comments, it was suggested that taxes on corporate profits are passed on to consumers. This is blasphemy in the religion free-market efficiency, because profit is not a “cost” that can be passed on to consumers. If it were, then businesses would just raise the rate of profit as high as they wanted.

      1. Warren

        “[Profit] is not a ‘cost’ that can be passed on to consumers. If it were, then businesses would just raise the rate of profit as high as they wanted.”

        In the absence of competition (a monopoly), that is what they do — at least until the number of units sold falls to the point where units*profit-per-unit starts to decline.

        With competition, some companies are willing to take lower profits to get market share (again, units*profit-per-unit). Some companies work to increase profits by lowering costs (improving productivity).

        There is also competition for capital. If an investor can get a 10% profit anywhere, will he invest in a country that taxes his profit at 30%, or in a country that does not tax it at all?

        1. kramer

          The point I was making was a rebuttal to an earlier statement that taxes on profits can be passed on to consumers. Taxes on profit are not an unavoidable expense. As you say, another player could just choose to accept a lower profit and thus pay less tax.

    2. Warren

      “What does civil society get in return for all the benefits that are made available to corporations?”

      Jobs, products and services.

      1. Jeremy Grimm

        Jobs? Corporations laid people off and sent work overseas — at least what work they could. To take care of other jobs they’re pushing for a boost in the H1-B Visas.

        Products? Those are made overseas unless you count Windows 10 or the latest Apple Design sold at inflated prices. Products and quality are sliding. Small business have all but disappeared and small retail is a rarity — Mom and Pop were sent to the home.

        Services? Like our consolidated hospitals, Docs-in-a-Box or the services of Goldman Sachs?

        Besides — what do Corporations provide that a sole proprietorship can’t?

  9. Warren

    The argument about foreign ownership is completely specious — taxes are withheld from labor income, and can be withheld from dividend income, whether the payments are to foreigners, individuals, “unit trusts,” or any other entity.

    And this is totally ridiculous: ‘If you abolish the corporate tax, rich folk will reclassify their income as corporate income, so as to attract the zero-tax rate.’

    Then they won’t be able to use it, will they?

    Then there is this gem, which is quoted in the O.P.: “Most corporate income is untaxed at the individual level.”

    Well, let’s dig into the referenced paper and see why: “[Without] a corporate tax, much of the income of profitable firms would go untaxed in the United States since most corporate equity is held in tax-exempt form. New evidence suggests that perhaps as little as 24 percent of U.S. equities are held in accounts that are taxable by the U.S. government. Stephen Rosenthal and Lydia Austin at the non-profit Tax Policy Center in Washington, D.C. use Federal Reserve data to derive the share of U.S. equities owned by taxable U.S. individuals, finding that it has declined sharply in recent decades due to increasing foreign ownership and, even more importantly, because of the growth of untaxed accounts, particularly retirement savings plans and Individual Retirement Accounts.”

    I have already addressed that — just have the corporations withhold taxes on dividends.

    But, oh, the horror of allowing individuals and non-profits to get the money, rather than the government! We can’t have THAT!

    And in case you missed it, IRA’s and 401(k)’s ARE taxed on withdrawal, so that income WILL get taxed. (And dividends and realized capital gains in those accounts will be taxed as ordinary income, not at the lower rates for dividend income and long-term capitals gains. This is the price of tax deferral.)

    1. kramer

      One issue to consider is that many of the corporate class do their personal spending directly from the corporate pocket book, classifying this as a corporate expense. These expenses can include cars, jets, and vacations to Vegas for a trade shows. This practice is essentially untaxed income, and along with foreign ownership and the growing market share of foreign corporations leaves me thinking we need to also be taxing gross revenues or taxing at the point of sale.

      1. LA Mike

        “The Economic Entity Assumption” from Accounting 101. In practice, it doesn’t exist. Owners use companies for tons of personal expenses. It’s rampant.

        I was thinking the same thing as you, Kramer.

    2. Jeremy Grimm

      I didn’t read this comment of yours closely before now. If I had I wouldn’t have made my comment above.

  10. LA Mike

    Slight tangent here…

    But I don’t understand why we don’t have redistributive forces on gains. Examples:

    1) A cap on executive salary/stock awards multiples. No exec can make over 40 times the average salary. Somehow we built skyscrapers and automobiles without the multiple going over 20-30.

    2) IPO’s must distribute shares to employees on some sort of prorated basis.

    3) Employees also get prorated cuts of dividends.

    4) With income tax, bring back a much higher top marginal rate for dollars over say, $3m. Get that number to 70% or higher. We built the greatest middle class in earth’s history this way.

    Why on earth do we accept the ownership class getting all the gains? It’s absurd and immoral on the face of it. Did Steve Jobs assemble all of the Apple 2E’s by hand and sell them himself? Did he manufacture and sell iPhones by hand? Of course not. So, he doesn’t get an enormous majority of the gain. Same goes for Ellison, Zuckerberg, etc. All ships rise.

    Sure, we can talk about lowering corporate tax once gains are shared by all employees. It’s sort of like when employers still talk about “loyalty”. My first response is always, “Oh, so you’re offering a pension?” Show some loyalty by sharing gains and then you’ll get loyalty in return.

    (On another tangent, I have a stock response for people who profess a strong belief in capitalism and unrestricted free markets. “Oh, so you believe in monopolies?” They always freeze right up, perplexed.)

    1. Skippy

      I think its important to also understand the Nikeification wrt corps, HQ with admin, design, marketing – sales, all Mfg is subcontracted out so they actually don’t make anything. Its just brand identification w/a share price.

  11. Wade Riddick

    This article doesn’t think through the disturbing implications of corporate tax cuts enough.

    These are some of the claimants on corporate assets superior to common stock shareholders in a bankruptcy:

    + Secured lenders/bondholders
    + Customers
    + Suppliers
    + Employees

    You are suborning fraud when you elevate common stock interests to the top of the heap by claiming CEO’s have to maximize shareholder value. Shkreli was committing fraud when he said Turing Pharmaceutical had to hike its prices several thousand percent on a drug because it was “price inelastic” and he had a fiduciary duty to his common stock shareholders to maximize profits at the expense of patients who could die. His patients (customers) had a superior interest – as did his employees, suppliers and lenders.

    I would just like to point out, in my limited understanding of the corporate tax code, when you cut the corporate income tax you’re justifying yet another angle to transferring money away from these interests – secured lenders, customers, suppliers and employees – to the common stock shareholders who are increasingly the stock-compensated management and various billionaire shareholders.

    Correct me if I’m wrong, but if corporate taxes were higher, wouldn’t there be a greater incentive to push money into employee compensation?

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