Why Eliminating the Corporate Income Tax Wouldn't Let People Dodge the Taxman

Suggest eliminating the corporate income tax, and you are immediately beset by people claiming that this would just let people dodge all their tax obligations by becoming corporations. Not a few of them intimate that this is, in fact, my goal.  Let me reprise my answer from a couple of years ago:

Every time I suggest eliminating the corporate income tax, I am beset by horrified people saying "But . . . what's to stop me from becoming a corporation and evading taxes that way?"

Well, what's stopping you now? Your rent is money thrown to the winds; a corporation's rent is an expense deductible from income. Your car payment is a millstone around your neck; for a corporation, it's another deduction. Your travel is an expensive pleasure; corporate travel just further ratchets the amount Uncle Sam collects at the end of the year. Even at a 35% corporate income tax rate, this would be a big net win for most people. So why don't you become a corporation and take advantage of this fact?

Because the IRS won't let you, that's why. When the "corporation" buys things that are clearly for your consumption, that's taxable income to you. People who have thriving businesses and report very little income get a long, hard look from the audit department, and usually walk away with a hefty penalty for tax evasion.

There's no reason that it would be any harder to keep people from evading taxes this way if we eliminated the corporate income tax. The IRS would catch you the way they catch most tax evaders: comparing your alleged income to your bank accounts and zip code. This is why you occasionally see bewildered live-in housekeepers on television surrounded by a squad of auditors.

If you are not a tax professional, and you think that you have discovered some novel way to avoid paying taxes, you haven't.  Any obvious dodge you can think up has already been tried by some clever chap fifty years ago, and frustrated by the IRS and the tax courts long since.  As I understand it there is often minor chiseling at family businesses, but if it goes beyond giving your daughter a summer job she doesn't show up for (and has to pay income tax on), you are near-certain to be caught.  When you are, you will pay for your tomfoolery many, many times over.

This is, incidentally, why your employer pays you in cash and not in kind.  Corporations can take all sorts of things as expenses that people can't:  housing, cars, power boats, etc.  If the IRS allowed this sort of thing to go on, you and your company could work out very lucrative deals where they paid your rent, bought your car, refinished your dining room table, and so forth.  But since those things are also taxable to you as income except in narrow circumstances (cars used mostly for work, corporate housing near distant consulting sites), there would be no net benefit.  So you usually only get benefits that have specific tax exclusions:  retirement accounts, insurance, educational assistance.