By T. R. Reid
Special To The Washington Post
Republican leaders have proposed to cut the corporate income-tax rate to 20 percent, in a tax plan that adds $1.7 trillion to the deficit over the next decade. How should Democrats respond?
They should propose to cut the corporate tax rate to zero — in a tax plan that doesn’t add a penny to the deficit. That way, congressional Democrats can be fiscally responsible and pro-business, promoting new jobs and investment while soaking the rich at the same time.
The time has come to kill the corporate income tax once and for all because that tax simply doesn’t work any more. It used to bring in about 30 percent of federal revenue. Today, even with record corporate profits, it amounts to barely 9 percent of total tax payments.
That’s because corporations spend hundreds of millions devising ways to avoid the income tax. If we eliminate the tax, the firms could spend that money for capital investment and job creation. And the thousands of Internal Revenue Service employees now assigned to collect corporate taxes could focus instead on catching upper-bracket evaders of the personal income tax.
In any case, the Republican plan for a corporate tax rate of 20 percent won’t stop corporations from shifting profits overseas. Many countries have tax rates lower than 20 percent, including such desirable venues as Ireland (12.5 percent), Canada (15 percent) and Germany (15 percent). Bermuda has a corporate rate of zero, which perhaps explains the existence of a subsidiary called Google Bermuda Unlimited.
Beyond that, nations will cut special deals to lure corporate money from the United States. When Caterpillar, the maker of those iconic yellow earthmovers, shifted the profits from its spare-parts business to Switzerland, the Swiss agreed to a tax rate of around 6 percent, according to the Senate Permanent Subcommittee on Investigations. Would a U.S. rate of 20 percent induce Caterpillar to bring that business home?
In short, cutting the rate to 20 percent would slash federal revenue sharply without achieving the goal it is designed for. But a zero-percent rate would give corporations no reason to send profits or jobs overseas.
The government wouldn’t have to lose any money from eliminating the corporate income tax. Indeed, it would probably take in more.
The United States could collect the revenue it gets now from the corporate tax by taxing corporate distributions through the personal income tax. The money that companies pay out for dividends, stock options, executive perks, commissions, C-Suite bonuses and incentive payments would all be taxed at the full personal income-tax rate. Because most business big shots are in the top income brackets, those distributions would actually be taxed at a higher rate than they are now through the corporate income tax.
If corporations use their zero-percent tax windfall to buy back their own stock — causing their stock prices to rise — the capital gains tax would bring in more and more revenue. To make this work, Congress would have to tax capital gains at the same rate as labor income.
Conservatives, of course, will denounce such a move as a socialist attack on income from investments. Democrats can reply that the last person to make the capital gains rate the same as the top income-tax rate was that notorious socialist Ronald Reagan. Explaining his 1986 tax-reform plan, Reagan said the capital gains rate had to be raised to stop the “fast-money boys” from devising accounting tricks to cut their tax burden.
It would be fascinating to see how business leaders respond to Democrats proposing eliminating the tax on corporate profits. In theory, they would have to embrace this bold move — it would save their companies large sums and significantly enhance the bottom line. But this plan would increase the personal income taxes of highly paid executives. Would chief executives dare to oppose it in order to protect their own bank accounts?
So far, the Democrats have had little to say in response to the GOP plan for corporate income-tax cuts. Proposing a zero-percent corporate income-tax rate, with no increase in the deficit, would in a single stroke make them champions of U.S. industry and the darlings of fiscal conservatives everywhere.
T.R. Reid is the author of “A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System.”
T.R. Reid
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