"We have by far the worst corporate tax system in the world."
So began today's presentation by a Big Four accounting firm tax partner making the case for transferring intellectual property and corporate operations to friendlier climes overseas. I've written about the awful US corporate tax system before, but let's think about the issue from a new angle.
What would happen if we tried some fundamental transformation of the way the United States taxes corporate income?
I mean, corporations don't really pay taxes, they pass these costs along to shareholders and customers. So why not eliminate income tax at the corporate level, levying profits only when they reach the shareholders? This would allow capital to accumulate in a business, fueling job growth and investment, while eliminating today's perverse incentive to favor debt over equity. We all know the dangers of excessive debt at this point, don't we?
A zero-tax regime at the corporate level would encourage every multi-national in the world to shift assets, intellectual property and manufacturing operations into the United States--the reverse of today's "tax efficient" stance.
Net corporate profits would instantly increase by 25 percent or so in aggregate, fueling an immediate stock market boom, with an attendant boost to depressed 401(k)s and underfunded public and private pension plans.
Small businesses would also benefit, incorporating in droves to allow retained earnings to accumulate and fund enterprise growth. Proprietors would only pay income tax on the money taken out of the business as salary or dividends (the tax on dividend income would be raised to equal the W-2 schedule).
I haven't thought this through very deeply, so please help me out. What do you think would happen if the world's worst business taxation regime became the best?