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.