Swamppundit

True Confessions time. Admit it. You know diddly-squat about corporate income taxes. In fact, you have never, ever, even once had a serious conversation on this topic, have you? The truth be told, neither have I. What normal person sits around talking about corporate income taxes? None that I know of.

Should we all be talking about corporate income taxes? Damn straight we should. Why? Because of the same reason Willie Sutton robbed banks - that's where the money is. Billions and billions are paid each year in corporate income taxes. Billions and billions are not paid each year due to loopholes in corporate income tax law. It may be dry, boring, complicated and dull, but it involves big bucks.

Before I go on about taxes, however, I have to talk about corporations in general. Strange thing, a corporation. Its most important feature is simply that it exists - that it is something that can be called "it." By being an "it," it becomes a separate and distinct entity. People can come and go from it, but it remains. People can work hard to build up its value, and then sell "it" to someone else. What the Common Law did that was so important is that the Common Law gave "it" the right to bring a lawsuit (or defend a lawsuit) just as if "it" were a "he." (Or a "she.") As far as the Common Law is concerned, an "it" and a "he" were on equal footing. (An "it" actually did better in the old Common Law than a "she.")

Without the ability to be recognized by the law, an "it" could not function. An "it" could not enter into contracts unless "it" could go to court to enforce those contracts if they were broken. A "he" would not enter into a contract with an "it" unless the "he" could haul the "it" into court if "it" breached the agreement.

The Common Law is not delusional. The law knows that a corporation is not really a person. The law pretends "it" is a person simply because the law understands that contract law, and tort law, work better if they so pretend. (Lawyers call this a legal fiction.) Because the Common Law is not delusional, it does not treat corporations the same as people in all situations. Real live people have the right not to give incriminating evidence against themselves. Corporations do not. A corporation cannot "take the fifth." What societal good can result from letting a corporation have the privilege against self-incrimination? None. Corporations can sue and be sued not because having this ability is good for the corporation, but because all of society benefits from letting corporations have this ability. Is it fair to the corporation to not let the corporation have the privilege against self-incrimination? Who cares? The corporation is an "it." As an "it," it has no feelings, no emotions, no human sense of right and wrong, and no human sense of fairness. As an "it," it also is not entitled to any human sympathy, or any human compassion, or any human fairness. Unless, of course, society as a whole benefits by being "fair" to corporations.

What, pray tell, does all this have to do with the corporate income tax, you may ask. Simply this: there is no inherent need to be fair to corporations when taxing them. "They" don't care about fairness because they are "its" and "its" don't care about anything.

When people talk about personal income taxes, fairness gets translated into ability to pay. The more money you make, the greater your ability to pay. For reasons unknown and stupid, this idea was carried over to corporate income taxes. That assumes what is fair and appropriate for a person is fair and appropriate for an "it." This is pure lunacy. Corporations are not people. They get no pleasure from money, and they suffer no pain from the lack of money. A rich corporation is an unfeeling legal fiction with a large bank account. A poor corporation is an unfeeling legal fiction with a small bank account. Neither legal fiction feels any emotion of guilt, or civic pride, or patriotism. Any theory of corporate taxation that is based on "ability to pay" is a theory that bestows on non-human corporations the right to human fairness. Is society, as a whole, benefited by such a policy? I don't see how.

Don't try and sell me that old scam that corporations have shareholders that are people and therefore you have to be fair to the shareholders. Wrong, wrong, wrong. You make the corporate tax rules any damn way you want. Then, after the rules are made, people can decide to buy shares or not buy shares. As long as they buy shares knowing what the rules are, they have no right to complain about them no matter how "unfair" they are.

Is society benefited by taxing corporations? Sure. The government needs money to run. The more money raised by corporate taxation, the less that needs to be raised by personal taxation. An argument could be made that we should finance the government entirely by corporate taxes. The corporations won't mind. As an "it," a corporation does not mind anything. The corporations would simply raise prices to pay for the higher taxes. In one very real sense, the real taxpayers would be the customers who paid the higher prices.

If fairness is to be considered in the context of corporate income taxes, then consider fairness to the customers who ultimately pay the tax. What if the law was that only automobile companies paid taxes, and the tax was set at 50% of the car's price. Is such a tax fair to the "it" known as the Ford Motor Company? No, but so what? That is not a sufficient reason not to have such a tax system. Is it fair to the people that buy cars? No. Such people would end up paying more than their fair share of taxes. Why should a person buying a new car give the government thousands of dollars while a person buying a new refrigerator doesn't have to give the government anything?

Imagine two very large corporations. Each of them employs thousands of workers. Each of them has multiple factories and other physical assets. Each of them buys and consumes raw materials and manufactured parts and each corporation puts them together to make automobiles. They each make and sell thousands and thousands of cars. They are roughly the same size, and do roughly the same thing. One is called The Saturn Car Company, and the other is called The Jeep Automobile Company. Assume The Saturn Company has no profits, and pays no taxes. Assume The Jeep Company has huge profits and pays taxes.

Question: why should the buyers of Jeeps pay extra in order to support the government, while the buyers of Saturns do not? Does this make sense? No. It makes no sense whatsoever. Assuming that Saturn and Jeep are roughly the same size and do roughly the same thing, their taxes should be roughly the same. Both corporations would pass the taxes on to their customers and that would be fine.

Should corporations be taxed at all? I say yes and here is why: as businesses, corporations consume the benefits of government. Corporate cars and trucks use the roads, so corporations that have cars and trucks should help pay for the roads. Since corporations profit from having educated workers, corporations should help pay for public education. Corporations that trade internationally benefit from the activities of the State Department, the Commerce Department and the Defense Department. These corporations (and therefore the customers of these corporations) should help pay for these departments.

Should this tax obligation be based on ability to pay? No. Why on earth should it? Corporate cars and trucks use the roads the same amount regardless of whether or not the corporation turns a profit. If the rationale for taxing corporations is to charge them for their consumption of government benefits, then ability to pay (i.e. profits) should have absolutely nothing to do with it.

So how should the tax be figured? Good question. Before getting to specifics, here are some rules for taxing corporations. One, don't get hung up on fairness. The concept is wasted on an "it." You can and should however, consider fairness to the customers of the corporation, but not to the corporation itself. Two, since fairness is not paramount, you can, and should, make simplicity paramount. Keep it simple, keep it straight forward, and avoid exceptions to the rules. If the rules are a bit unfair to a particular corporation or group of corporations, tough. Let them to pass the unfairness on their customers. In the end, the free market will sort it all out. Three, try to avoid distorting normal business decisions. If a business is tempted to do a dumb thing simply to save on taxes, you probably have a dumb tax. Four, it is better to tax a small percentage of a big number, than a large percentage of a small number. The smaller the percentage, the smaller the incentive to cheat, and the smaller the potential to distort business decisions.

Use these rules and you will get a tax based on a big number that is hard to manipulate as opposed to a small number than is easy to manipulate. This is another big problem with the current ability-to-pay tax system. In corporate financial books, the number for profits is the smallest number and the number most subject to manipulation. You take that fact and add the fact that the corporate tax rate is 48%, and you get a system that invites tax cheating and manipulation. (You also get a system that subsidizes $50 dollar business lunches, $1000 Super Bowl tickets, $100,000 stadium luxury boxes, and a system that produces something called "paper loses," but that is another story.)

A nice big number that is tough to manipulate is gross revenue - every last dollar that comes into the business. If you want to tax corporations, take a percentage of every dollar of gross revenue. No deductions, no exemptions, no credits, no allowances (but one). Regardless of whether or not the company made a profit, the tax is the same. Regardless of whether or not the company is a manufacturing company, a services company, a raw materials company, a wholesaler or a retailer, the tax is the same.

Here is the one exception: there is an accounting principle known as "cost of the goods sold." When I use this term I do not mean all costs and expenses. I mean only the actual cost paid to someone else of a physical thing that was included in the product ultimately sold. I would permit a deduction from gross revenue for cost of goods sold. I have two reasons for this. First, the high gross revenues of wholesalers and retailers do not accurately reflect the true size of the businesses and the extent to which they consume government. Second, without such a deduction, the economic decisions involved in setting up both a production system and a distribution system could become very skewed. If there was a full tax applied every time an item changed hands, there would be a strong incentive to reduce the number of hands. (Okay, I admit fleshing out this one exception would take a small volume, but let's skip that for now.)

Am I certain that no other deductions are appropriate? Certain? No. As a normal person, I don't talk about this subject, remember? I suppose I could be talked into other deductions, but not many. Just as with personal income taxes, one person's legitimate deduction is another person's lobbyist-purchased loophole. Keep it simple and keep it based on a very very big number in order to keep the taxing percentage very very small. It would be my goal to keep the taxing percentage under 5% and still raise the same amount of money raised by the current system.

That assumes, of course, that you want to raise the same amount of money as the current system. If someone wants to make an argument for raising a bigger (or smaller) slice of the pie through corporate or business taxes, I'm willing to listen.

Would my tax system do away with the $50-a-plate business lunch? Not directly, but it damn well would do away with the taxpayers paying for $24 of that lunch. It is bad enough that expense-account types live a life style more lavish than what their "salary" could afford, but it is truly galling that working stiff taxpayers have to help pay for it.

C E Sutton

UPDATE: This essay is about the Exxons of the world. It is not about the untold thousands of small corporations in which most of the employees and all of the shareholders are from one family. Taxing those "its" involve a whole new set of issues.