“Abolish corporate taxes?!?”

Read on.

It hardly needs saying that President Biden has a lot on his plate right now: Addressing Covid–19 disruptions, rebuilding the nation’s infrastructure, and the Green New Deal are among the many initiatives he now proposes to undertake.

It would therefore seem the height of political overkill to throw corporate tax reform into the mix, but the president has at least opened the door to a conversation about Corporate America’s tax obligations, having called for restoring at least a portion of the rate of taxation Donald Trump cut drastically by way of his 2017 Tax Cuts and Jobs Act.  

As counterintuitive as it sounds, Biden might be better off going in the opposite direction. There is a cogent argument for eliminating the federal corporation tax altogether. Before you gulp and throw this piece in the rubbish, let me state clearly: This is not some Milt Friedman fantasy to “defund” the entire federal government. Nothing of the sort. The key points in support of this position are these: 

⁋Taxing corporations doesn’t actually raise much in the way of revenues;

⁋ Corporate taxes encourages offshoring;

⁋ These tax burdens incentivizes corporations to accumulate debt—a tactic intended to minimize their tax liabilities; 

⁋ Corporate taxation is highly complex, and as a result of tax-related lobbying efforts has converted the tax code into a political plaything for lobbyists and wealthy oligarchs.

Given these considerations, instead of fiddling around with the rate of a particularly pernicious tax that induces excessive leverage and financial instability, it is best to abolish it. Instead, progressively tax the income of the people who benefit from the profits generated by corporation: the board members, managers, employees, and shareholders. 

To be sure, there is nothing particularly onerous about Biden’s proposal to raise the corporate tax rate to 28 percent. In the post–World War II context, the new figure still runs well below the levels that obtained from 1950s through to the 1980s.  Indeed, the “punitive” tax rates that existed during the Eisenhower years—90 percent income taxes, 52 percent corporate—coincided with some of the strongest periods of U.S. GDP growth on record. (And so much for the axiomatic saw of the supply-siders to the effect that tax cuts in and of themselves unleash massive increases in investment and corresponding economic activities.)  

The core argument for taking corporate taxes entirely out of the code is that it will improve economic efficiency while also bringing greater equity to the American tax system. In that regard, it is consistent with the progressive thrust of Biden’s other proposed policies. The argument is not, then, so complicated or strange as it may appear. Imputing all profits to the owners of corporations and taxing these profits progressively as income is a far more equitable way to achieve smart tax reform than what is now currently on the table.

President Trump’s 2017 tax cuts brought the corporate rate down to 21 percent from 35 percent. Biden is nothing if not ambitious in his plans to redress this radical move. (This is to go by what Biden says he will do, which is not always, or indeed often, what he intends to do.) Along with the president’s proposed increase to 28 percent, he has offered something to his global counterparts that has been around for a while but which no U.S. president had heretofore seriously contemplated: a global minimum corporate tax rate of 21 percent to be paid by large businesses wherever on the planet they operate. The aim here is to mitigate international tax arbitrage, whereby sovereign governments indulge multinationals by letting them book paper transactions in low-tax jurisdictions such as Ireland or Bermuda, even if they are making widgets in Wichita. Ireland’s corporate rate is 12.5 percent; Bermuda’s is 7 percent. 

Of course, any such multipolar tax policy will require a degree of global coordination that we have to count unprecedented, with the possible exception of the broad alliances that formed during the last century’s world wars. Unless all relevant countries—especially those in the European Union and Asia—go all-in on the Biden proposal, it’s an idea that will go nowhere. This is, indeed, my estimation of its destiny. The world, let us not miss, has not been able to draw together even in the globally shared fight against Covid–19. Unlikely, as in very unlikely, notwithstanding the recently optimistic musings to the contrary by Chrystia Freeland, Canada’s finance minister. Paschal Donohoe, Ireland’s finance minister, has already signaled the country will resist attempts to rebalance the global tax system if they affect Dublin’s ability to undercut its rivals.

If President Biden is serious about genuine tax reform, however, he doesn’t need to secure international agreement and should drop the grand, global ambition, in my view. What he could accomplish on the domestic front would be even more radical in any case, were he to rethink the concept of corporate taxation, consider it relative to more productive alternatives, or, even better, eliminate it altogether.

Some context is useful here, so that we can avoid casting our president as Biden the Bold. To begin with, there is the fact that corporate tax revenue is no longer a big source of income for the federal government. A recent paper by economists Edward Lane and L. Randall Wray observes that

inflation-adjusted receipts from the corporate income tax averaged around $200 billion a year over the postwar period; thus, as a percentage of GDP and total tax revenue, they have become much less important over time. 

There is also the sheer cost of compliance with an increasingly complex tax structure: Lane and Wray cite a 2016 analysis by the nonpartisan Tax Foundation, which estimated “that the estimated tax compliance costs for US businesses was about $147 billion, with another $46 billion spent by owners of S–corporations.” S–corporations, shorthand for “small business corporations,” designates those enterprises the IRS grants special tax dispensation that allows them to pass  corporate income, credits, and deductions through to their shareholders.

Even if corporate taxes were raised and substantial pools of taxable income were found in all the corporate shelters, there is potentially a better place to extract taxes that would have less of a penalty on business: A financial transactions tax could easily offset the lost revenue, for instance. A 2015 study by Robert Pollin, James Heintz, and Thomas Herndon analyzed the 2015 version of Senator Bernie Sanders’s Inclusive Prosperity Act and “concluded conservatively” that the proposed financial transaction tax could raise an additional $220 billion annually. This number holds, Pollin and Heintz calculate, even when we factor in a projected 50 percent decline in trading volume and some tax avoidance as a result of introducing the FTT.

This kind of tax would have the additional benefit of curbing unnecessary financial speculation and financial rentierism. Further, even if one concedes that the liquidity of stocks and some other financial assets would be reduced, one has to question the social utility of something like computer-generated high-frequency trading, which has contributed to market meltdowns in the past such as the 2010 “flash crash.” Truth be told, it’s hardly likely that long-term capital provisions for companies will be severely affected if the funding takes a few hours (or days), rather than a nanosecond or two.

As noted earlier, proposals to eliminate the federal corporate tax are not grounded in some Chicago School fantasy to defund the government and destroy the kinds of programs that the Biden administration now seeks to introduce. Calls for the abolition of corporate taxation started with the writings of former Federal Reserve Governor Beardsley Ruml (who was, for a central banker, a surprisingly progressive supporter of the New Deal back in the 1930s). In a 1946 speech to the American Bar Association, Ruml argued that corporate taxes distorted decision-making: They meant that businesses essentially were taking actions to minimize taxes rather than those that would otherwise make the best business sense.

Two of those types of actions are highly relevant today. First is the bias corporate taxes produce for debt financing over equity financing because interest on debt can be written off as an expense, which means that corporations have an incentive to take on debt rather than to finance investment out of earnings or equity issues. Ruml noted that this could lead to excessively risky debt buildup. History has proven him 100 percent correct on this score.We need look no further than the 2008 crisis to understand Ruml’s prescience.

Second, Ruml observed how tax arbitrage often meant relocating corporations, which could be against the national interest as jobs were shifted abroad and valuable social capital degraded in the process. In today’s hyper-globalized economy, higher rates on corporations encourage relocation, which then rewards a competitive race to the bottom among nations—as they slash wages and taxes to attract multinational corporations.

The corporate tax, Ruml argued, was ultimately paid by stockholders, employees, and consumers. That argument still applies today. Stockholders pay a portion because their returns are reduced compared with what they would be without the tax. However, note that those who own stock in a company also pay taxes on their income and the capital gains that result from ownership. Many others have pointed to this “double taxation” from both ends of the political spectrum, the main argument being that if the corporate tax is eliminated, one also eliminates the problem of double taxation—the taxing of corporate income and distributed dividends. 

That said, this double taxation argument is but a small subset of the bigger picture:  A tax system should not incentivize bad economic behavior. At the end of the day, if it is desirable to tax income accruing to corporations, the best solution would be to allocate all corporate profits to owners and to tax them as income through the progressive income tax.

As Ruml argued:

The money taken from corporations must come from the people directly, in higher prices. Or from the corporations’ employees in wages lower than they otherwise would be. Or from corporations’ shareholders in lower rates of return on their investments.

It is impossible to know exactly who pays how much of the taxes on corporation profits. It is certain, however, that the stockholder does not pay all of it and, indeed, he may pay very little of it. This tax becomes another cost of production and gets passed along, either in higher prices or lower wages — which includes inferior work conditions.

Hyman Minsky, the noted economist active in latter half of the 20th century, agreed with Ruml. As Lane and Wray note, “Minsky too contended that imputing corporate income to owners, and then taxing it through a progressive income tax, would help to reduce the incentive to avoid taxes in this manner.” Again, Minsky’s point had nothing to do with a government’s need for revenues, but, rather, with the equity of the tax burden.

In the past, the reaction of shareholders (as measured by market activity) to changes in corporate tax rates clearly suggests that they do consider themselves the bearers of a substantial benefits if and when a corporate tax cut is introduced. This is because markets intuit that, in the long run, as corporations strive to maintain and improve their profit margins—they do so by raising prices and/or cutting costs, including wage and benefit costs. That implicitly supports the idea that shareholders bear little cost when corporate tax rates are introduced. That would suggest that an equilibrating offset ought to be introduced.

We might therefore be able to dispense with the corporate tax altogether if we were to adopt a flow-through treatment for all corporations, or if we tax share-market gains on an accrual basis. If corporate taxes were eliminated and replaced with an ordinary income tax on the change in value (unrealized gain) of stocks of publicly traded companies and book value for private companies, and all realized gains and distributions taxed as ordinary income, life would be a lot simpler—and we wouldn’t have the anomalous scenario of Warren Buffett paying less tax than his secretary. Yes, people with moderate incomes also own stock, but many have their stock in retirement plans that would escape the proposed new imputed taxes until final distribution.

While trying to create global industry standards and maintain global intellectual property rights, trade bodies such as the World Trade Organization do not also insist on common labor standards or tax rates.Over the last few decades, in consequence, major corporations have been under tremendous pressure to avoid, evade, or shift taxes in our hyper-competitive, globalized world, in which labor and tax arbitrage is encouraged. 

Effective tax rates have fallen considerably over the years, to the point when the corporate tax is no longer a major revenue source for governments. On the contrary, it is yet another illustration of our “pay to play” system in which political favors are distributed via an increasingly complex and manifestly unfair tax system. Eliminating a major source of political corruption via the abolition of the corporate tax is something that would make Biden’s legacy more comparable to that of FDR. The abolition of this tax, if replaced with a more progressive income tax code, would eliminate many of the perverse tax avoidance/debt accumulation activities that the current code encourages, as well as restoring a modicum of equity into our economic system.