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Treat Corporations as Partnerships for Personal Income Taxation
Raymond Richman, 1/21/2013

Many taxpayers believe that the Corporate Income Tax falls mainly on the wealthy. In fact, the wealthy do own a large proportion of corporate wealth. But workers pension funds own a significant share of corporate wealth. An organization noted for its opposition to wealth and income inequality produced the following estimates: 

Distribution of US Stock Market wealth, 2007

Population                     % of Stocket Market Wealth  

Top one percent                      38.2

90 -99th percentile                    43.0

80-90th percentile                       9.9

60-80th percentile                       6.4

 0-60th percentile                        2.5

What is surprising about the above distribution of stock market wealth is not that stock market wealth is highly concentrated but that the bottom eighty percent owns as much as 8.9 percent of total stock market wealth. This means that they were taxed at up to 35% on their corporate earnings, most of it probably in their IRAs, 401s, or other pension accounts. The burden of the corporate tax on the wealthiest ten percent is taxed at the top corporate rate of 35 percent which was also the top rate of personal income tax. In effect, the bottom eighty percent are taxed by the corporate income tax at the same rate as the wealthiest one percent. The bottom one percent probably pay no personal income tax but their share of corporate income is tax at the highest corporate rate.

There is an additional important reason for integrating the corporate income tax with the personal income tax. An eminent University of Chicago economist in a seminal article which has been largely ignored argues that the corporate income tax is shifted to American consumers and is therefore a regressive tax but that it cannot be shifted to foreign consumers when exported because its foreign competitors are untaxed.This puts American corporations at a competitive disadvantage in international trade as we pointed out on this site in a recent posting.

Corporate dividends and interest payments are subject to personal income\ taxes. For the year 2012, the maximum rate on dividend receipts and capital gains was 15%. Expecting dividends to be taxed at normal rates up to 39.6 percent, shareholders pressured their boards of directors to pay extra dividends in 2012. While this benefited wealthy shareholders, most in the lower half of income earners paid no personal income tax at all and did not benefit from the low rates on dividends and capital gains in effect in 2011 and 2012..

Taxpayers in the lower income tax brackets are penalized by the corporate income tax and many taxpayers in the upper brackets benefit from the postponement of any personal income tax on retained earnings.

Our solution. Corporation income should be given the same treatment as partnerships and private equities. There would be no corporate income tax but shareholders would have to pay income tax on their share of corporate earnings whether retained by the corporation or paid out as dividends. More on this is a subsequent article on this site. In the meantime, you can read our 2008 book which has a chapter on the corporate income tax.

Many believe that the unequal distribution of wealth and income is bad or evil. What is the complaint-- that the rich don’t deserve their wealth or income? The facts are that the wealthy do not consume their wealth but donate much of it to charitable, educational, and health institutions, and their estates pay tax on what is left. Their wealth is usually the result of wise investment, inventions, and accumulated profits and salaries. The high remunerations paid to executives of businesses and financial institutions are authorized by the boards of directors elected by the shareholders. If the latter don’t object, why should non-shareholders?  Our estate taxes and income taxes have progressive structures designed to make the distribution after tax more equal.

Some of the wealthy inherited their wealth and are less deserving. Are the taxes they pay on inheritances too low? Perhaps. Most Democratic politicians believe it to be so and some seem unwilling to raise rates. Most Republican politicians believe the rates are too high. Some advocate eliminating the estate tax entirely, but they do not suggest another tax to replace the lost revenue. Their main argument being that heirs are often forced to sell businesses they inherit. Why that is bad, we are not sure. And there are alternatives to selling a business if they want to keep control. And what if the heirs don’t want to continue the business? And what tax would the Republicans substitute to make up for the loss in revenues. What tax would be better for business?They would cut expenditures but in their the last election campaign they proposed no cuts in specific expenditures. We’ve made recommendations on this site to cut a number of federal programs. Not that Democrats were any better than the Republicans. After four years of trillion dollar deficits, they seem gung ho on raising taxes and increasing expenditures.  

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]