How to Save America

In which our intrepid social commentator boils down all the challenges facing our great nation into a relative handful of simple—but not simplistic—solutions.

STEP FOUR: ELIMINATE CORPORATE TAXES

Here’s a trick question for all my friends both liberal and conservative: What percentage of U.S. taxes are paid by for-profit businesses?

And the answer is: zero.

Yes, it’s hard to believe at first, but corporations really don’t pay any taxes to the government. Instead, they collect money from customers and then forward it to Uncle Sam, or Aunt Virginia, or Cousin Austin, but they don’t actually pay the taxes themselves.

Wait, you say. What about income taxes? Aren’t corporate income taxes a payment by the corporation to the government? Not really. Instead, the corporation is forced to take money that could have been paid to shareholders (owners) in the form of dividends and passes it on the government instead.

Dividends, of course, are the worst example of all, because they’re taxed when earned by the corporation and taxed again when received by the shareholder. If a company earns $100 and decides to transfer all of it to shareholders in the form of dividends, the shareholder would actually see $40 or less of the $100 after both corporate and individual taxes are levied.  The real tax rate on dividends paid to shareholders is more than 60%, but about 30% of that tax rate is hidden by “corporate taxes.”

Ultimately, we, the people, pay all the taxes. They, the politicians, make us feel better about those payments by telling us they’re taxing corporations instead of individuals, but that’s kinda not really true. We pay more for products and services, receive smaller dividends and gain less from investment in stock—all the result of the myth that businesses actually pay any tax at all.

So, if business taxes are simply a passthrough payment ultimately made by individuals, why do we go through this charade at all? There are two primary reasons:

  1. Economic/Social engineering. Government taxes some businesses more than others, or offers tax incentives to a select group of industries, as a means of directing economic activity. Tax breaks for green technologies or for export activity are examples of this practice. One can agree or disagree with the economic/social engineering issue, but tax policy is not the only way to drive economic activity.
  2. Re-election. Taxation of business is good for politicians who want to remain in office, because they can say they are making business pay its “fair share.” And many people nod their heads as if that’s true.

Meanwhile, vast industries are created to support corporate taxation. Whether it’s tax attorneys or accountants or lobbyists or the restaurants the lobbyists frequent, business taxation is expensive and complicated.

It would all be much simpler, of course, if there was no corporate tax at all. Companies would save money by having less complexity in their finances, costs of products would fall because the tax passthroughs would be eliminated, and individuals would get a clearer idea of exactly how much tax they’re really paying.

Which is, of course, why it will never happen. Even if it is a simply perfect idea.

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