Thursday, May 23, 2013

On the Back of the Cocktail Napkin

Note: My ideas on this subject are heavily influenced by CoyoteBlog and Asymmetrical Information

Another US tax system rant, inspired by the recent Apple testimony and the IRS investigation.

After implementing the changes to personal income tax I described earlier, eliminate the corporate income tax.

Long version:
There appears to be a ton of effort going into minimizing corporate taxes. From the corporation's point of view, the effort makes sense. There is the potential to save a lot of money, and the officers of a company are motivated to make the company profitable. Hiring a group of smart tax people in order to minimize this tax liability is a net win for them. That effort isn't really productive in an economic sense, it's just playing games with regulations, sometimes even lobbying to change the regulations. When they do this, many of us are left with the vague notion that large corporations are doing legal but sketchy things to avoid paying taxes and cheating small businesses and the rest of us. What to do?

Eliminate the corporate income tax. Tax the money when it hits a person. This money will show up as either dividends or capital gains from increased share price. Building on my previous tax rant about eliminating deductions and special classes of income for personal income tax, income from capital gains and dividends would not be given special treatment on individual tax returns. It would be taxed at the regular progressive income tax rates for the individuals that receive it.

What about Apple hiding money in Ireland and other countries to avoid taxes? Why would they still do this? The lowest corporate tax in Ireland is 12.5%. Under this plan there would be no corporate tax in the US. Zero is less than 12.5%. If Apple thinks it can best use that money here, they’ll move that money back into the US.

What about the Tea Party IRS 501(c) scandal? 501(c) is a part of the IRS code that allows incorporated groups to ask the IRS for tax-exempt status. This whole problem disappears entirely. There would be no such thing as tax-exempt corporations or groups, because no incorporated group would have to file tax returns. Whether you think the IRS did any wrong or not, under this plan there is no longer a decision for the IRS to make.

Finally, corporations no longer spend time and money trying to minimize their tax burden or to lobby for special tax status. That's got to be a net win for the economy.

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