Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

How the Corporate Income Tax Creates Billionaires and Punishes the Middle Class
Raymond Richman, 9/11/2013

The U.S. corporate income tax violates nearly every criterion of a good tax. It is expensive to administer and to comply with. It violates the principle that persons with equal incomes and circumstances should  bear an equal burden. It causes corporations to engage in uneconomic practices, including relying too heavily on debt financing and too little on equity financing. It encourages corporations to buy-back their shares instead of paying dividends. It encourages the corporation’s principal shareholders to retain earnings and pay little or no dividends that would be subject to high personal income tax rates. Corporate earnings are taxed twice, once by the tax on corporate earnings and again by the personal income tax when paid out in dividends. Because the rates of tax differ widely among countries, the high rates of the U.S. tax puts American corporations at a competitive disadvantage in foreign trade. And, importantly, the corporate income tax is not as progressive as it is believed to be and may not be progressive at all.  In fact, it worsens the distribution of income; probably the principal reason we have so many billionaires.

In effect, the corporate income tax enables the controlling shareholders to reinvest their corporate income free of personal income tax. And it may even be free of corporate income tax! Economists widely believe that the tax is passed forward to consumers or backward to employees; they reason that corporate investors must at the margin earn the same return as unincorporated businesses or they would not invest in corporations which are subject to a corporation income tax.

Prof. Arnold Harberger, an eminent economist, argues that corporations that sell their products domestically are able to pass the tax forward to consumers or backward to their employees but corporations that export much of what they produce cannot pass the tax forward to consumers because of international competition. But corporations with earnings abroad have an advantage in that they pay no tax until their foreign earnings are repatriated so they can reinvest their earnings abroad without paying any personal income tax.

Corporate shares are widely believed to be owned preponderantly by the wealthy. This may be true but pension funds, whose beneficiaries are workers, and mutual funds that are widely held by the middle class, own a substantial portion of corporate wealth. Many of the beneficiaries are in brackets below the basic rate of the corporate income tax. Their earning are thus taxed at the high rate of corporate tax and taxed again when they receive the pensions and dividends.

What distinguishes corporations from partnerships and proprietorships is the limited liability of corporate shareholders. But partnerships have in fact achieved limited liability for its investors by laws that permit limited liability partners and relaxed rules about who the general partners may be. Limited liability partners’ shares are traded on the major exchanges just as corporate shares are traded. One notices in the news these days the taking of corporations private; one of the reasons, perhaps the main reason, is to avoid the corporate income tax.

Why are corporations taxed differently than partnerships? The answer is to be found in the anti-big business and the anti-trust movement of the late 1890s and early 1900s. Even corporations that were not trusts or “combinations in restraint of trade” came to be viewed as a threat to consumers when in fact they created an economy having the highest standard of living by increasing the demand for workers with the resulting increase in average wages. Whatever the reason for the anti-corporate bias, a corporate income was enacted and a separate personal income tax was enacted as soon as the 16th Amendment to the Constitution was adopted.

It was not the British experience. Britain’s Income and Property Tax Acts which date from before the Tudors, re-enacted under the reign of William and Mary in the last decade of the 17th century, and re-enacted under William Pitt in 1803, integrated the corporate and personal income tax. Corporations paid the standard rate of income tax and households were credited with those payments on the dividends they received. When the Income and Property Tax was re-enacted in 1862, its provisions were almost identical to the earlier Income and Property Taxes. The British taxed corporations until the end of WWII as part of the personal income tax not as an entity separate from its owners but as taxation at the source of personal income derived from corporations. Corporations paid the basic rate of income taxation on their earnings and shareholders were credited with the basic rate of income tax on income earned by the corporation. (That lunacy is contagious is illustrated by the fact that after labor took power in the 1940s, the British imitated the worst characteristics of the U.S. income tax system including high rates (up to 98%), imposing a separate corporate income tax, and imposing a capital gains tax separate from the income tax.)

Except for its high cost of compliance, the personal income tax gets high ratings from economists. However, economists have called attention to some negative economic effects, for example seeking and finding ways to avoid high rates of tax. Because capital gains are taxed at lower rates than ordinary income, corporations, instead of paying dividends, buy back outstanding shares which, other things equal, raises the prices of the outstanding shares enabling shareholders to realize lower-taxed capital gains. This is the principal cause of corporations buying back their shares to raise the price of the remaining outstanding shares instead of simply paying dividends which are normally taxed at standard rates. But as we have shown elsewhere this can be easily corrected by appropriate treatment of capital gains, by, for example, un-taxing capital gains that are rolled over, i.e., reinvested (the treatment accorded to homes) and taxing consumed gains at the same rates as ordinary income.

Progressive income taxes do little to equalize incomes. Progressive expenditures like free public education, Medicaid, food stamps, public libraries, public parks and recreational facilities, welfare, public safety, public entertainment, et .al. are the great equalizers of income.

While the progressive personal income tax is highly regarded by economists, their acceptance of the corporate income tax is hard to justify. It violates almost all of the principles of taxation.  As is typical of democracies, bad laws which have a constituency are never repealed.

But there is also an equity argument against the corporate income tax. The corporation is an association of individuals, its shareholders. Those who do business as a partnership are taxed on their individual shares of the partnership as personal income. The partnership is not taxed as such. The partners must declare under the personal income tax their share of the partnership’s net income. While the corporation can be used as a device to lower the tax burdens on the upper-income shareholders simply by retaining earnings or by converting earnings into capital gains as we’ve shown, partnerships cannot be used to play such games. High income partners pay high personal income taxes on their partnership income and low income partners pay lower rates of personal income tax on their income from partnerships.    

The corporation is an association of individuals, its shareholders. So is a partnership .Those who do business as a partnership are taxed on their partnership earnings as personal income. The partnership is not taxed as such. The partners must declare under the personal income tax their share of the partnership’s net income. While the corporation can be used as a device to lower the tax burdens on the upper-income shareholders simply by retaining earnings or by converting earnings into capital gains as we’ve shown, partnerships cannot be used to play such gains. High income partners pay high personal income tax on their partnership income and low income partners pay lower rates of personal income tax on their income from partnerships. It is time to tax corporate earnings as the personal income of the corporation’s shareholders.   

Your Name:

Post a Comment:

Comment by Ted Frank, 10/26/2013:

I have argued for years that the corporate income tax should be abolished because it is mainly paid by the consumers (the only REAL taxpayers) of the corporations' products or services, passed on to them because the corporate income tax is a category of costs of doing business just like wages and overhead. This argument should be made relentlessly because politicians obscure this fact from low-information (even high-information) voters when arguing that corprations should "pay their fair share" of the country's total tax burden. Most voters, however, buy into the notion that if corporations paid more, individual taxpayers could pay less. Howver, individuals are the only ones who truly pay ALL taxes imposed by government, the varied methods of taxation merely taking different routes to the taxing entities. Apart from abolishing the corporate income tax, a discussion needs to be had on the fairest and most efficient (from a cost of collection standpoint) taxes governments should use to raise needed revenue. Then, of course, the more philosophical question is what functions government should actually be engaged in (Constitutionally?) requiring revenue for its implementation?

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Dec 2021
    Nov 2021
    Oct 2021
    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014
    Apr 2014
    Mar 2014
    Feb 2014
    Jan 2014
    Dec 2013
    Nov 2013
    Oct 2013
    Sep 2013

    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term

    Economy - Short Term
    Environmental Regulation
    Last 100 Years
    Real Estate Taxation

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [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]