November 8, 2013

It was funny when Mitt Romney made his now classic statement: “Corporations are people too, my friend” when people at a political rally suggested he should raise taxes on corporations. Granted, that was probably not the smartest comment to make, when you are trying to shake off the reputation of being a heartless technocrat; but he had a point. As he himself tried to explain over the laughter that erupted, corporations are ultimately owned by shareholders and operated by workers, so taxing corporations is similar to taxing people. 

However, as the latest reports on Apple, Google and Twitter show, corporations are much better than people at avoiding taxes. So, is it even worth trying? Wouldn’t it be better to get rid of corporate taxes altogether and just get better at taxing people?

Keep or Abolish Corporate Income Taxes

Obviously this is a controversial subject, and there are several reasons you could raise in favor of keeping corporate taxes. For instance, to abolish corporate income taxes would reduce tax revenue by around $372 billion, which would reduce the government’s ability to help those who need it the most. Corporate taxes also place a brake on excessive corporate power, which was one of the big reasons it received enough bipartisan support to become law in the first place. However, there is a case to be made for doing away with corporate taxes, regardless of your preferred flavor of politics. Here are three reasons.

Corporate Taxes are Inefficient

As small-government and free-market supporters like to highlight, taxes have a deadweight effect on the economy. Their mere existence creates a drag on businesses’ ability to grow and prosper. Corporate taxes are more of a drag than practically any other tax. According to a 2013 report by the Congressional Budget Office, for every dollar raised by corporate taxation, it costs 24 to 65 cents to the market in added costs to the economy. And yes, in case you’re wondering, those figures are as bad as they sound.

It Distorts Free Market Incentives

Early in 2013, Apple borrowed $17 billion as part of a $55 billion repurchase of shares, even though the technology giant had $100 billion in cash. Why would a successful company decide to pay interest on a loan they didn’t need? Two words: corporate taxes. Interest payments are tax deductible. Just by borrowing money to buy its own stock, Apple saved $9.2 billion. Corporate taxes are in effect subsidizing the corporate lending industry and creating a huge incentive to invest other people’s money.

Corporate Taxes Are Way Too Complicated

Avoiding the payment of taxes is good for businesses, but it is not cheap. Large corporations waste outrageous amounts of money employing armies of accountants and tax lawyers and creating a complex network of subsidiaries and shell companies just to avoid paying corporate taxes. Imagine the boost to the economy if companies invested those resources into their businesses. If you printed the tax code and piled the pages, it would be 28-feet high. Just Apple’s tax return for 2012, was two-feet high. All that complexity creates an inefficient and unnecessary use of resources.

It’s Time for Change

It’s easy to bash corporate taxes. Strike that. It’s easy to bash taxes – period. However, corporate taxes are a large source of revenue that funds programs that are valuable to taxpayers. As bad as corporate taxes may be, achieving bipartisan support to an alternative source of tax dollars might be impossible in the current political climate. Nevertheless, you don’t have to believe taxation is tantamount to slavery to see that corporate taxes could, and perhaps should, be overhauled — or even replaced — with a more efficient and straightforward tax.

Photo: Michael Fleshman