Corporate Income Tax & the Double Taxation Myth

Dean BakerThere is something that rich people and their apologists talk about a lot. It is the idea that the corporate income tax is wrong because the owners of those corporations have to pay income tax twice: once for the company and once for the individual. Dean Baker provided the standard response to this nonsense, The Myth of the Corporate Income Tax as Double Taxation. Basically, it comes down to this: no one is forcing people to set up their businesses as corporations. People do it knowing that they will have to pay corporate income taxes. And they do it anyway, because they get a great deal of benefit — most especially protection against liability.

But there are several other things that I don’t understand about this whining point of the rich. The first is, “Corporations are people, my friend.” Corporations have First Amendment rights. Why shouldn’t such an entity have to pay income taxes? Really, I don’t get it. This whole discussion seems to be the usual thing where the rich want all the advantages of whatever they have, but none of the responsibilities. And since they only talk to each other, they get the idea that somehow it makes sense their corporate status should give them all kinds of benefits that other business people don’t get, but that they shouldn’t have to pay anything for it.

The rich and their apologists know that it makes no sense to complain about the corporate income tax. In fact, as Dean Baker noted, “The corporate income tax is a 100% voluntary tax…”

Let’s consider a little thought experiment. Let’s suppose that I hire you as a maid. I don’t pay you with my pre-tax salary; I pay you with my post-tax salary. I get paid and I pay my taxes. With the money left over, I pay you, and you too have to pay income taxes. How is this any different? The reason that corporations have these special rights is that they are a special kind of person. From the profits of the corporations, shareholders are paid. The fact that they don’t do any work (unlike the maid) doesn’t change things; they are being paid because they put money into the company. So yeah, this is double income tax — just like it is when anyone hires someone else.

But what I really don’t get is the Shakespeare aspect of this, “What’s in a name? That which we call a rose by any other word would smell as sweet.” What does it matter that we call these two taxes the corporate and individual income taxes? I’m being taxed all the time. I make money and I pay income and payroll taxes on it. Then I spend the money and I pay consumption taxes. The big issue here is that the rich are laser focused on the federal income tax.

I’ve talked about this a lot, most recently in, Why We Only Talk About the Income Tax. We have a system where property taxes are very slightly regressive (the poor pay more than the rich). Consumption taxes are quite regressive. And payroll taxes are ridiculously regressive. The income tax is the only part of the tax system that is even moderately progressive. So we talk talk talk about the income tax.

The rich and their apologists know that it makes no sense to complain about the corporate income tax. In fact, as Dean Baker noted, “The corporate income tax is a 100% voluntary tax…” It’s a tax they complain about paying, but they aren’t required to pay it. But it’s the usual whining point of the rich about everything: they don’t believe they should have to pay for anything they get. They want special privileges that other people and businesses don’t get, but they think it shouldn’t cost them anything.

I’ve long been in favor of eliminating the corporation — especially when I was a libertarian. So I say we give the rich what they want: repeal the corporate income tax — right along with the corporation as a legal entity. Do I have any takers?

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

8 thoughts on “Corporate Income Tax & the Double Taxation Myth

  1. I’m not sure why the corporate income tax exists. Why not repeal it? As is, it’s not equitable- the person who owns five shares pays the same rate as the person who owns 10,000 shares. Why not pay out all the profits in dividends and tax them as regular income?

    There may be downsides to this. I’m not an expert, which is why I don’t understand what you mean about abolishing corporations altogether.

    • The corporate income tax exists because corporations are their own entities. If I pollute my neighbor’s hard, I am personally responsible. I can be sued and all my money taken away. If a corporation does the same thing, the owners of the corporation can not (in general) be held accountable. But as I noted: corporations are what they are. No one forces anyone to structure their businesses as corporations.

      As for why I don’t believe in corporations: they allow companies to become bigger than they normally would. I think one of the biggest problems over the last many decades is that there are no people who are personally accountable for their business decisions. This leads to companies being run on a quarterly time frame.

  2. This is mostly part of Republican posturing that cutting corporate taxes (and shielding corporations from class-action lawsuits, exempting them from environmental regulations) is intended to help small business owners. It trades on the fact that most Americans don’t understand what corporations are — they think Wal-Mart and Aunt Emma’s Pie Shoppe on the corner are subject to the same rules.

    There was a moment where the curtain slipped a few years ago. One of Obama’s SOTU addresses talked about raising taxes on corporations which outsourced jobs, and lowering them on small businesses which created good jobs. Immediately the think tanks went into Panic Mode, as such a policy would be enormously popular. I saw editorial after editorial from the usual suspects (Heritage, etc) explaining how small businesses really don’t create jobs, only multinationals. It didn’t last long as the proposal went nowhere. Panic avoided; the GOP could go back to its customary doubletalk about getting government off the back of farmers & small business owners.

    • Yeah, small businesses are only useful in so far as they can be used to fool people into helping big businesses.

    • Ah yes. I remember in grad school having a friend who was a very strong Democrat and thought me a freakish libertarian. That is to say, he understood that I was basically a liberal (or even a socialist) but still a libertarian. And one day I told him I would like to get rid of the corporation as a legal construct and he said, “That’s the most radical thing I’ve ever heard you say.” I’m still waiting for someone to explain to me why it is so radical. I mean: I understand why he said it. But for an idealist, I don’t see what the problem is. How do corporations make the world better? I really don’t think they do.

      • Well, let’s take the hypothetical example of two islands. Each has its own language, culture, etc. Hating on the other island is a time-tested political rallying point.

        So I come up with the idea of building a bridge between the islands. It’ll have all the usual benefits, trade, reducing redundancies, etc. But I don’t have the money to build it myself, and I can’t convince the government of either island to build it.

        If I have some rich friends, fine, we can build the bridge together. If I don’t, I can maybe sell the idea to a bunch of people who buy small shares. And nobody who buys small shares is fiscally responsible if I take everyone’s money and run off to open a harem in Zanzibar. They lose the value of their shares; other shareholders can’t come after their houses, family jewelry, etc.

        That’s the ideal, at least. As we know, it doesn’t remotely work that way. Corporations are basically tax hedges and liability loopholes. In theory, there might be a way for a similar model to work properly. In practice, it’s an unqualified disaster.

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