Are corporations over-taxed?

Are U.S. taxes on corporate profits too high?  They are the second-highest in the industrial world.

Many European countries keep corporate taxes relatively low by raising money through the Value-Added Tax, a kind of sales tax imposed at every stage of production on the value is supposedly added.  The advantage from the standpoint of government is that the tax is invisible; prices in European countries are generally higher than in the United States, but the reason is not immediately obvious to the consumer.

Another advantage of a VAT is that it is rebated on goods that are exported.  The United States years ago tried to offer subsidies for exports equivalent to VAT rebates, but this was ruled an unfair trade practice by the World Trade Organization.

Don’t weep for corporations, though. Nearly two-thirds of U.S. companies, including General Electric and ExxonMobil, pay no U.S. income taxes at all.  In large part, this is because they get credit against their U.S. taxes for taxes they pay in foreign countries, and they arrange things so that most or all their profits are earned in foreign countries.

Some say that corporate profits shouldn’t be taxed at all.  The argument is that corporate stockholders are taxed twice, once when the corporation reports a profit and a second time when the stockholder receives a dividend. My answer is that, as a stockholder in a corporation, I get many benefits not available to an individual businessperson. The corporation is an artificial person which acts as a buffer between its creditors and me, the owner. If a corporation goes under, the most I can lose is what I invested; all other losses are absorbed by other people.

Another advantage of owning stock is that I have a choice as to when and whether I sell it and take a capital gain.  If I have stock in my estate when I die, in most cases the gain in the stock price over my lifetime is not taxed at all.

The economist Robert Reich, who was Secretary of Labor in the Clinton administration, suggested in his book Supercapitalism that corporations be exempted from income taxation, but owners of stock be taxed both on dividends and on reinvested profits.  In theory, this would be fair, if investment income were taxed at the same rate as wages and salaries. In practice, this would be a huge deterrent to investing in stocks; in a year like 2009 when the value of my stock portfolio fell through the basement, I would still face a sizable tax liability for those reinvested profits.

Senators Ron Wyden, an Oregon Democrat, and Judd Gregg, a New Hampshire Republican, have proposed a tax bill which they say would close the loopholes that would enable corporations to avoid paying U.S. taxes, while lowering the top corporate income tax rate from 35 percent to 24 percent. President Obama hasn’t taken a position on it, but their idea reportedly has White House support.

I guess I am for this if the loopholes really are closed. I don’t have an informed opinion as to what corporate tax rates should be; from the government’s standpoint, it is better to get some revenue from a 24 percent top rate than zero revenue from a 35 percent rate.

My misgiving is that the proposal is in part a reaction to the power of corporations to play national governments against each other. They have the power to to pack up and move if they don’t like a national policy.  The only solution in the long run is international agreement on corporate taxes through some body such as the Organization for Economic Cooperation and Development.

Click on this for a comparison of U.S. corporate and individual tax rates with those of other industrial countries.

Click on this for a report on few corporations pay any U.S. corporate income tax at all.

Click on this for an explanation of how General Electric avoids paying U.S. taxes.

Click on this for a report on how ExxonMobil avoids paying U.S. taxes.

Click on this for more details about the Wyden-Gregg proposal.

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