Ideas: Fixing the World July/August 2009

End the Corporate Income Tax


The corporate income tax may be the stupidest tax we have. At 35 percent, America’s levy on corporate income is one of the highest in the developed world. In 2007, about 2.5 million companies prepared lengthy returns at great expense, yet the tax generated only about 15 percent of total federal tax revenue. The tax on corporate profits discourages capital formation, targets shareholders regardless of their wealth, and fuels frantic, and costly, business efforts to dodge it. Among experts who study its effects, support for the tax is at best sort of sheepish. Yet as taxes go, it is relatively popular.

When confronted with all the economic costs of the tax, and its anemic contribution to federal coffers (even though in 2007, it accounted for a higher proportion of tax revenue than it did in 1985), its supporters generally call for “closing the loopholes.” But such efforts have historically only made the tax code more complex, raising compliance costs and creating new opportunities for avoidance.

By one estimate, what companies spend in complying with the tax equals almost 13 percent of the tax bill they owe—and that’s the smallest drawback. Corporations go to extraordinary lengths to avoid taxes. Entire investment-banking firms and law practices have been built solely for the purpose of creating valuable tax deductions, and they employ highly educated and skilled people who could make a greater contribution to society by … well, doing almost anything else, really.

But the most compelling reason to eliminate the corporate income tax is that it doesn’t target those with the most ability (or obligation) to pay. A company’s owners won’t necessarily be the ones who bear the tax—corporations might decide, for example, to pass on the cost of the tax to employees in the form of smaller bonuses. And even if you could guarantee that the fat-cat managers and the owners bear the brunt of the tax, those “owners” aren’t necessarily rich—they could be retirees invested in pension funds, or small shareholders.

Democrats are looking at ways to lower the rate and “close loopholes” so that more corporate revenue, particularly profits earned abroad, gets hit by the tax. But Uncle Sam could collect at least as much revenue in a more progressive and less distorting manner by eliminating the thing entirely, and raising taxes on capital-gains and dividend income (which were previously kept low to ease the negative impact of “double taxation”—taxing corporate profits first as corporate income, and then again as shareholder income). That might not provide the moral thrill of demanding that corporations cough up their “fair share.” But with so many real advantages, it’s an idea that both left and right ought to be able to get behind.

Jump to comments
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Get Today's Top Stories in Your Inbox (preview)

Social Security: The Greatest Government Policy of All Time?

It's the most effective anti-poverty program in U.S. history. So why do some people hate it?

Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus


Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.


Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.


Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.


Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.


The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air



More in Business

More back issues, Sept 1995 to present.

Just In