These days I find myself getting increasingly frustrated whenever I hear people talk or read something people have written about whether to allow the “Bush tax cuts” to expire or not. I was against the tax cuts when they were originally being discussed nine years ago because I thought they were the wrong tax cuts.
What people seem to forget is that consumption has a number of different components. First, there’s the sort of consumption that people usually think about: personal consumption. That’s when you or I buy a house, a hat, or a cheeseburger. But that’s not the only sort. There’s also business consumption and government consumption.
When a business buys a desktop computer or installs a new phone system, it’s consumption. And when the federal government buys anything or, indeed, spends anything, that’s consumption, too. During the recession of the early Aughts there were precious few signs that either consumer spending or government spending had decreased but business spending, business consumption was flagging. That’s why I thought the right sort of tax cut was one that supported business consumption rather than personal consumption.
However, that’s not what I find frustrating. Obviously, people have never heard of Subchapter-S Corporations.
Most small businesses are sole proprietorships. These are frequently very small, gross revenues of under $200,000. When people say that only 2% of small businesses would be hurt by letting the “Bush tax cuts” lapse that’s largely because such a large percentage of small businesses are these tiny sole proprietorships.
However, most of these very small businesses don’t hire very many people, either.
My guess is that most of those 2% of small businesses that would be hurt are S-corps. An S-corp is a corporation in which the profits of the corporation are treated as personal income by the principles. I’ve been a principle in S-corps at times in the past. Because of their accounting capital accumulation by S-corps can be pretty difficult. What we routinely did was plow our profits back into the corporation. In effect they were only nominally personal earnings at all.
Unless the corporation is growing extremely quickly an increase in the personal tax rate could suck a lot of the “capital” out of these corporations. My guess is that there’s a rush to convert S-corps into C-corps right about now.
IMO what should really happen is that we should abolish the corporate income tax altogether and increase the individual income tax on higher earning income individuals in a revenue neutral way to prevent the deficit from getting any worse. That would chop an enormous amount of inefficiency and overhead out of our system and we’d see people making business decisions for economic reasons rather than tax-avoidance reasons. Exercises like the regular extension of investment tax credits would be a thing of the past.
Right on! I have been advocating for an elimination of corporate taxes for years. Way too much money and time is spent on their prep. Too much corruption comes from trying to avoid them. Lastly, corporate taxes do not provide a really big part of federal revenue anyway. I would rather replace it with a consumption tax of some sort and a moderate increase in the death tax.
Steve
I support taxation of corporations; the rate is debatable. Corporations exist to act as artificial persons, enjoying all of the benefits of natural persons, plus potential immortality. Corporations enjoy publicly sponsored goods like police protection and enforcement of property and contract rights. Shouldn’t they pay taxes for this?
And as long as we are flirting with a zero-percent estate tax, I think we would have to figure out some way to deal with capital accumulation in corporations and families.
I think that the taxation of corporate income as presently constituted is distorting. We could do what every other OECD country does and allow current year expensing of all business expenses, i.e. no depreciation.
Another distortion is the effort expended to avoid taxation. Better to eliminate the corporate income tax entirely.
There’s no rush to convert from S to C Corp status down here. That would only mean that to get money out as an officer, other than through a salary, would require taking taxable dividends (instead of K-1 distributions). That means the Corporation is taxed on the income, and then the officer is taxed on the same income again when it’s taken as a dividend, so we’re back to double taxation. Now if C-Corps were not subject to tax then it would work, but since that’s not the case there’s no rush to change anything under the current state of ‘unusual uncertainty’.
The other thing I’d examine besides shifting tax burdens from corporations to individuals is eliminating the bribery from the tax code – our tax expenditures are simply crazy. Our average tax rate is relatively low when we own a house, have kids etc, but we still make the decision to work more OT on the marginal rate which is too high. Better to eliminate as many deductions as possible – especially housing related ones that are basically giveaways to the upper middle class and above – and lower the marginal rates we all make decisions to deliver pizza at night to make more money on.