Why getting rid of the corporate income tax makes sense

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by Sheila Blair,

from Fortune Magazine,

Maybe instead of chasing corporate tax inverters, how about chasing a solution in the tax code?

Big banks can breathe a sigh of relief. The public has a new villain—tax inverters—companies that renounce their U.S. citizenship to get better tax rates overseas.

The tepid recovery has pressured CEOs to generate earnings by slashing expenses. Telling them to ignore foreign tax dodges to save money is like telling a toddler to keep his hands out of a cookie jar sitting in easy reach.

To be sure, we need a short-term fix for inversions. But longer term, we need to fundamentally rethink our corporate tax system. Corporate taxes are a dwindling resource, threatening to become as scarce as clean air in Beijing.

Progressives mistakenly see corporate income taxes as a way to tax the rich. But we aren’t taxing the rich; we’re taxing a corporate entity, and studies show that much of the tax is passed on to employees and customers, not shareholders. The current system actually favors wealthy shareholders because we impose a lower tax on their capital gains and dividends to mitigate the impact of “double taxation.” It would be smarter to tax corporate profits once, at the shareholder level, and apply the same, higher rates on their capital gains and dividends that apply to us wage earners.

Conservatives, on the other hand, want to preserve the tax-privileged status of capital gains and dividends, arguing that it encourages investment and creates jobs. But alignment between real economic growth and investment returns is far from perfect. These days, when the economy strengthens, the stock market actually drops because investors fear that an improving economy will cause the Fed to exit its easy-money policies. Corporations game the system by issuing debt (whose interest is deductible) to increase dividends.

One thing is sure: We are on an unsustainable path. Caught between eroding corporate revenue on one side and low tax rates for wealthy investors on the other, middle- and upper-income wage earners are being squeezed—and there are only so many of us. At some point we might start thinking about moving too.

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