Ever since I took Tax I in law school, I have wanted to develop and argument that corporate taxation is really a fraud on individual (i.e., human) taxpayers. Generally, one view of corporate taxation is that corporations should pay more in taxes (often stated as their "fair share") so that the tax burden on individuals is less. Another view is that high corporate taxation reduces investment incentive, job growth, etc. Both views, in my opinion, miss the point because they assume that corporations actually pay taxes. But, more realistically, it should be understood that corporations actually don't pay taxes (regardless of the level of the corporate tax rate), only individuals pay taxes.
To present a simple example, let's consider the corporate taxes that might be paid by Coca Cola and where the money for such taxes actually comes from. Let's assume that a can of Coke sells for 2 dollars and that the corporate profit on the 2 dollars is 20%. So, Coca Cola just made 40 cents on that sale. And, let's assume that the corporate tax rate is 20% on those profits. So, that means Coca Cola pays 8 cents in corporate taxes. But, that does not mean that individual taxpayers now have 8 cents more in their pockets because Coca Cola paid the tax to the government . To the contrary, what really happened is that the tax was indirectly paid by individuals. That is, the purchaser of the Coke paid 8 cents more than he otherwise would have if there had not been a corporate tax on Coca Cola. So, although Coca Cola collected the tax and transferred it over to the government, the tax was mostly paid for by the purchaser of the Coke.
Depending on what would have happen to the price of the Coke if there had been no corporate tax, it is also possible that the result of the corporate taxation was that the employees were paid less than they otherwise would have been or the shareholders earned a lower return on their investments that they otherwise would have. The consequence of the corporate tax may hit each of those groups of individuals, but it doesn't really matter for the purposes of the explanation. What really matters is that the corporation is not really a taxpayer.
So, what does that all mean? Well, for one thing, we can conclude that corporate taxation is regressive and negatively impacts poor people. Why? Because poorer people spend most of their income buying things that are taxed. Less poor people save more money. So, because a corporate tax is at least partly like a sales tax, it is a regressive tax and not a progressive form of taxation. Normally, the pro-corporate tax crowd would argue that increasingly corporate taxation is good for lower income earners, but it is actually very bad for lower income earners. So, contrary to corporate taxation helping the lower income earners, it is working against them and they don't even know it. And, more generally corporate taxation is essentially an opaque way of taxing all individuals because (unless they have read this post) they don't realize that they are the ones paying corporate taxation.
As such, corporate taxation is largely a fraud on the individual taxpayers. So, instead of paying an effective personal tax rate of 30% or so on one's income, there is a huge hidden tax that individuals pay that pushes up their effective tax rate well beyond the 30%.
The solution is simple. Eliminate the corporate tax rate. That of course, would mean that the US Treasury would need more money and that would then only come from raising the effective tax rates of individual taxpayers. But, that's OK because individual taxpayers are already paying those higher taxes, as explained above. So, the consequences of eliminating the corporate tax rate would have at least two benefits. One, it would eliminate the fraud that is currently perpetuated on the individual taxpayer and make it more transparent how much in taxes that the individual taxpayers are actually paying. Two, the regressive consequences of the existing corporate taxation would be changed so that the additional taxes would be paid through the more progressive tax structure of individual income taxation.
To present a simple example, let's consider the corporate taxes that might be paid by Coca Cola and where the money for such taxes actually comes from. Let's assume that a can of Coke sells for 2 dollars and that the corporate profit on the 2 dollars is 20%. So, Coca Cola just made 40 cents on that sale. And, let's assume that the corporate tax rate is 20% on those profits. So, that means Coca Cola pays 8 cents in corporate taxes. But, that does not mean that individual taxpayers now have 8 cents more in their pockets because Coca Cola paid the tax to the government . To the contrary, what really happened is that the tax was indirectly paid by individuals. That is, the purchaser of the Coke paid 8 cents more than he otherwise would have if there had not been a corporate tax on Coca Cola. So, although Coca Cola collected the tax and transferred it over to the government, the tax was mostly paid for by the purchaser of the Coke.
Depending on what would have happen to the price of the Coke if there had been no corporate tax, it is also possible that the result of the corporate taxation was that the employees were paid less than they otherwise would have been or the shareholders earned a lower return on their investments that they otherwise would have. The consequence of the corporate tax may hit each of those groups of individuals, but it doesn't really matter for the purposes of the explanation. What really matters is that the corporation is not really a taxpayer.
So, what does that all mean? Well, for one thing, we can conclude that corporate taxation is regressive and negatively impacts poor people. Why? Because poorer people spend most of their income buying things that are taxed. Less poor people save more money. So, because a corporate tax is at least partly like a sales tax, it is a regressive tax and not a progressive form of taxation. Normally, the pro-corporate tax crowd would argue that increasingly corporate taxation is good for lower income earners, but it is actually very bad for lower income earners. So, contrary to corporate taxation helping the lower income earners, it is working against them and they don't even know it. And, more generally corporate taxation is essentially an opaque way of taxing all individuals because (unless they have read this post) they don't realize that they are the ones paying corporate taxation.
As such, corporate taxation is largely a fraud on the individual taxpayers. So, instead of paying an effective personal tax rate of 30% or so on one's income, there is a huge hidden tax that individuals pay that pushes up their effective tax rate well beyond the 30%.
The solution is simple. Eliminate the corporate tax rate. That of course, would mean that the US Treasury would need more money and that would then only come from raising the effective tax rates of individual taxpayers. But, that's OK because individual taxpayers are already paying those higher taxes, as explained above. So, the consequences of eliminating the corporate tax rate would have at least two benefits. One, it would eliminate the fraud that is currently perpetuated on the individual taxpayer and make it more transparent how much in taxes that the individual taxpayers are actually paying. Two, the regressive consequences of the existing corporate taxation would be changed so that the additional taxes would be paid through the more progressive tax structure of individual income taxation.
