Not All of the Reasons for Abolishing the Corporate Income Tax Are Good Ones

That the corporate income tax should be abolished is something I’ve said around here any number of times. I think that the corporate income tax should be abolished and the personal income tax, particularly on the highest income earners, should be raised commensurately. IMO we should give Warren Buffett what he says he wants and impose a tax of 10% on gross incomes of $100 million or more. It would be an interesting experiment. I think we’d be amazed at the rate at which the .1% would flee the United States and/or how fast their incomes would fall.

In the Wall Street Journal John Steele Gordon offers ten reasons to abolish to corporate income tax. Some of them are good ones. It would reduce the complexity of the tax code and render many lobbyists obsolete. And it would obviate the distinction between for-profit and not-for-profit corporations. The enormous salaries paid to the heads of United Way or the Red Cross make a mockery of the notion of “not-for-profit”.

However, I find some of his arguments pretty dubious. For example:

Fourth, with suddenly increased profits, corporations would increase both dividends and investment in plant and equipment, with very positive effects for the economy as a whole and increased revenue to the government through the personal income tax.

If Mr. Gordon has evidence that corporations increase their U. S. investment in proportion (or even fractionally for that matter) to after-tax profits, I’d certainly like to see it. I think that companies increase their investments based on perceived return rather than on the basis of after-tax profits.

Or this

Fifth, stock prices, which are a function of perceived future earnings, would rise substantially, inducing a wealth effect as people see their 401(k)s and mutual funds rising in value. That would lead to increased spending and thus increased tax revenues.

Stock prices are rising pretty fast right now even with corporate taxes. Are stock prices really “a function of perceived future earning”? Or are they stores of value? Or irrational, something for which there is pretty fair evidence? I’d really like to see some quantitative arguments here.

In the final analysis I think that we’ll have a corporate income tax for the foreseeable future for the very reason that Mr. Gordon gives as his tenth reason to abolish the corporate income tax:

Tenth, eliminating the corporate income tax would deal a blow to crony capitalism. Most U.S. government favors to industry are in the form of favorable tax treatment. Most subsidies for politically fashionable but otherwise unprofitable technologies, such as wind and solar power, are also part of the ever-expanding corporate tax code. No corporate tax code, no favorable tax treatment and no subsidies, except direct ones, which would be much easier to hold to political account.

Without the corporate income tax, Congress would have far weaker arguments for extracting contributions from corporate contributors and far fewer opportunies for lining their own pockets persuading companies to contribute to their re-election campaigns.

That’s the real irony. Most of the reasons we should abolish the corporate income tax are the very reasons the corporate income tax will never be abolished.