Wednesday, February 13, 2008

"Why the left should support a 0% corporate tax"

His statement about the consumer paying the corporate tax, in the form of higher prices, is partially true. Much of it is also paid by reducing the compensation to labor.

Link HT: Tax Prof

The only business form that pays a separate income tax is the standard "C" corporation. Sole proprietors, partnerships, subchapter S corps, and regular limited liability companies do not. (Some LLC's opt to be treated as a C corp for tax purposes and they are the exception.) All those other forms of business legal structure have to pass through their income and capital gains to the owners during the tax year. The individual owners then have to pay income taxes on the income and capital gains at their individual personal income tax rate.

If C corp's were treated like all other business forms, then they would no longer have an income tax to pay -- essentially reducing it to zero. However, forcing wealthy individuals to account for that income at their personal marginal tax rates would provide a huge boost in tax receipts. And it would be highly progressive. Whereas, the current corporate income taxation is in actuality just another cost of doing business and is passed on to the consumer via cost-plus pricing.

Passing the cost on to consumers in this way is no different than a sales tax, which is very regressive in nature. We fix that problem and increase tax receipts at the same time while also making US corporations more competitive in the global market.