Tax Analysts Blog

The Corporate Income Tax Will Never Be ‘Fixed.’ And That’s OK.

Posted on Jul 25, 2014

It’s popular, in some circles, to suggest eliminating the corporate income tax. Usually, the argument flows from worries about American competitiveness. Eliminate the corporate tax, and corporations around the world will flock to our shores.

Or so the story goes. In fact, it went that way recently at Bloomberg View, where Megan McArdle made the case for scrapping the corporate tax and replacing its revenues (and functionality) with a combination of higher personal income tax rates and a rollback in individual tax preferences for capital income.

This is not a crazy argument, although it’s definitely a utopian one. Or at least a deeply aspirational one. But it’s the job of opinion writers to suggest routes to a better future, even when the politics are complex or even hopeless.

I can see the appeal of a world without corporate income taxes. As I argued a few weeks ago, I think the tax is dying, falling victim (like so much else) to the disruptive forces of globalization and financial modernization.

But we shouldn’t get too fatalistic. Yes, the corporate tax is struggling to keep up. But to some degree, every tax struggles to stay functional and relevant over time. That struggle is often cast in human terms, pitting wily taxpayers against hapless (and underpaid) bureaucrats.

It’s a good story but an overdramatized one. The corporate income tax is dying not because corporations are cheating, or even because they are procuring special favors from eager-to-please politicians. The tax is faltering because it’s the nature of a tax to falter.

McArdle makes this point when she warns against the tendency to view the corporate tax as somehow corrupt or hopelessly politicized. To be sure, she concedes, “the tax code contains plenty of senseless giveaways to corporations.” But these are not the root of the problem, she points out: “Most of the loopholes that we argue about are not a result of congressional pandering, or even sharp lawyers who bend sensible rules. They’re an artifact of the fact that calculating corporate income is really hard.”

McArdle is oversimplifying here: Not all tax avoidance is created equal, and some of the most successful avoidance going on these days is certainly the product of “sharp lawyers” bending all sorts of rules.

But it is the nature of rules to be bent. And it is the nature of legislative “fixes” to themselves get bent in the wake of reform efforts. McArdle makes this point, too:

      You can also argue that the government should crack down on all this structuring. But this is precisely backward. Those armies of tax lawyers were raised because of all the earlier attempts to close the loopholes, which made more laws for them to study and exploit. Yet our response is always the same: even more laws to change the earlier laws that aren’t working.

Again, this is overstated; McArdle’s libertarian sympathies are clearly showing. But she has a point. Tax reform, in the form of legislation, will never “fix” the corporate tax once and for all.

But reform is still worth the effort, even when it’s doomed to fail. Because with any luck, it won’t fail immediately. It will buy time. Smart tax lawyers may find a way to circumvent new rules (that’s their job and obligation, if you ask me). But reform can slow them down. Ultimately, tax reform is a process, not a destination.

Again, I think the corporate income tax is on the way out. But that’s a long-term problem. It doesn’t mean we should throw in the towel right away. The corporate tax may, as McArdle suggests, be an “insane, unwinnable chess game” pitting lawyers against tax collectors. But for the time being, the game is still worth the candle.

Read Comments (4)

david brunoriJul 25, 2014

Joe, I think you agree that the corporate tax is in shambles (and on its way
out!) Why in the the world should we prolong the misery? The government take
continues to fall -- and everyone agrees it will continue to fall. The only
people making money are big law and big accounting. For them the tax is
certainly worth the candle. Junk the tax! Replace the revenue with higher
personal income taxes -- or better yet don't replace the revenue.

travis rechJul 28, 2014

I'm all for eliminating Corporate income taxation, just have to tax capital
gains and dividends at the same rates as normal income and we're all set.

emsig beobachterAug 4, 2014

Why not repeal ALL current forms of taxation and replace them with Jonathan
Swift's taxes on vice and vanity?

tong liuAug 5, 2014

Mr. Thorndike believes we can replace the corporate income tax with higher
personal income tax rates in order to make United States become more attractive
for multinational companies among the world. I believe that this method will be
easier for tax complain because all the personal income tax are reported to
federal and these record will help to track the personal income tax after
reformed. However, I think firms cares more about tax instead of tax form. It
would be more efficient if the U.S. government was to lower the tax rate and
form an alliance to have uniform tax rate or similar tax bases among
multinational business.

Moreover, the higher individual income tax rate would raise more problems, such
as the labor immigration or the outflow of money. Some people may immigrate to
other countries which have low individual income tax rates; or, they may use
sophisticated financial tools to avoid paying high individual personal income
tax. In that case, the income would flow out instead of staying in US. Thus,
although we attracted more companies from around the world by eliminating the
corporate income tax, total tax revenues may be lower despite the higher
personal income tax rates. So replacing the corporate income tax may not as
good as expect.

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