Corporate Taxes

Over the past fifty years the portion of the federal tax revenue paid by corporations has decreased dramatically. It is now almost irrelevant. Nevertheless corporations spend a great deal of time and money on finding ways to lower their tax liability even further.

This has several undesirable results. The cost of doing business is raised. In a typical arrangement a large corporation hires a tax consulting firm to create a way to lower their taxes. In return the consultant gets a portion of the savings as a fee. The government loses the revenue, the corporation wastes the money on the fee and the clever people at the consulting company are misused in socially unproductive work. In addition as was described in this folly it has a corrosive effect on the ethical behavior of congress.

A similar effect happens at the state and local level. Corporations play one area against another when looking to setup or expand a business in a particular locale. Governments are blackmailed into offering tax concessions to "attract" new business. As a consequence the cost of the additional services supplied by the locale are shifted to individuals or other businesses in the region that are not as adept at playing the tax game.

In addition the imbalance in tax policy puts some  companies at a disadvantage with other. The migration of shell corporations to off shore tax havens puts more ethical or patriotic companies at a competitive disadvantage.
 
What is needed is a way to remove the financial incentives to "creative accounting". The simplest is to eliminate the corporate tax on "profits" entirely.
This should be replaced by an alternative source of corporate revenue. There are many proposals floating around. The one that has been adopted most frequently elsewhere in the world is a value added tax (VAT). This is applied at each step of the production stage as a percentage of the "value" added by the company in processing it's product. So if I buy leather for $1 and make a pair of shoes that I wholesale for $5 the value added is $4 (ignoring labor and other costs, to simplify the example). Ranges of the tax are generally in the 10-20% range. So a 10% tax would collect $0.40 in the prior example.

Another approach might be a gross receipts tax based upon how much revenue a company takes in. This might make calculations easier in the case of service industries where the "value added" is less clear than in manufacturing.

Whatever approach is used it should have a simple underlying principal. Every company pays the tax and the rate is the same for all. There must be no special cases or exceptions or the tax avoidance industry will once again spring up as a socially unproductive parasite.

Ethical corporations should approve of this approach since it levels the playing field and makes for more fair competition. Whether corporations that have become expert at gaming the system agree is another matter. And the extortion game used by congress to finance their campaigns needs to be fixed or they will refuse to consider jeopardizing their own revenue streams.

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Copyright © 2004 Robert D Feinman
Feel free to use the ideas, but the words are mine.