Rethinking the Unthinkingly Boring

Thanksgiving Nightmare: Just as he passes you the cranberry sauce, Grandpa Blowhard begins an extended rant about the corporate income tax.

Compared to that, this post is a piece of cake, a mere thousand words.

According to the IRS, in 2022, total gross corporate revenue was about 45.3 TRILLION dollars. The IRS collected about 1% of that number.

What follows is not really about how much to tax corporations, but HOW to tax corporations.

Starting Premises:

• • • As non-persons, corporations are not patriotic nor do they have a moral obligation to give to charity or to pay a “fair share” to support the government.
    • Corporations, as non-people, never pay taxes. The money for corporate taxes comes from three groups of people: 1) corporate employees, 2) corporate customers, or 3) corporate shareholders. Congress does not decide who pays. Corporate management does.
    • Corporations do, however, receive benefits from government. Therefore, it is appropriate to tax corporations to help pay for government.
    • “Ability to Pay” (AKA, Profits) should play no role in corporate taxation. For corporations, taxes should be analogous to paying the government for utilities. Federal corporate taxes should be considered a non-negotiable cost of doing business.
      • • Corporations that own real estate pay local property taxes each year based solely on the value of the property. County tax collectors care nothing about profits, or lack thereof. The federal government should be equally heartless.

      
      
      
      
    
    
    • In theory, the more a corporation benefits from government, the more it should pay in taxes. In reality, it is impossible to measure how much a corporation benefits from government. Therefore, some proxy measurement must be used.
    
    
    • Transparency and Simplicity are paramount values. Therefore this proxy measurement must be transparent and easily calculated.
    
    
    • Treating all corporate competitors the same is important, but that does not mean treating all corporations the same is important. The proxy measurement for retailers need not be the same as the proxy measurement for manufacturers, or miners, or service providers.
    
    
    • “Fair share” has nothing to do with profits. Assume two companies are in the same business. They have roughly the same number of employees and the same amount of physical assets. By any analysis, you would assume they derived equal benefits from government. Company A had a nice profit last year. Company B had no profit because a) poor product design, b) CEO overpaid himself and entire management team, c) all profits were reinvested into the company to finance growth, or d) who cares?
    
    
    • If corporate taxes are based on profits, a company can lower its taxes by raising its expenses. Hence, Company A pays less in taxes if it buys Super Bowl tickets and picks up the tab for expensive lunches.
    
    
    • It is better to take a small percentage of a big number that is easily calculated and difficult to manipulate, than to take a larger percentage of a smaller number that is obscure and easy to manipulate.
      • • The smallest number in corporate books, and the number easiest to manipulate, is profits.
        • The largest number in corporate books, and the number hardest to manipulate, is Gross Revenue.

      
      
      
      
    
    
    
    
  
  
  
  

The proposal is as follows:

• • • There should be a single corporate tax rate that should apply to all corporations regardless of their profitability.
    • The tax rate should apply to what I call “adjusted gross revenue.” The permissible adjustments will depend on the nature of the business conducted by the corporation.
      • • If the business is a retailer or wholesaler, it may subtract from Gross Revenue the Cost of Goods Sold as documented by payments to third-party vendors for the sold item.
        • If the business is a manufacturer, it may subtract from Gross Revenue payments to third-party vendors for raw materials that ultimately become part of the products manufactured, and/or payments for component sub-parts that ultimately becomes part of the products.
        • If the business is a miner or driller, it may subtract from Gross Revenue money spent to pay for mineral rights or drilling rights.
        • If the business is an insurance company, it may subtract from Gross Revenue money paid to settle insurance claims.
        • If the business performs a service, I do not see an appropriate adjustment. Such a corporation would pay a tax based on Gross Revenue.
        • No corporation gets to deduct employee expenses, equipment expenses, debt service expenses, or general overhead expenses.

      
      
      
      
    
    
    • Again, this essay does not propose a particular tax rate other than to say it should be small. For instance, if the goal is to raise the same amount of tax money as the current corporate tax system. I am confident that goal could be reached by a tax rate below 3%.
    
    
    • Estimated tax payments would be required quarterly.
    
    
    
    
  
  
  
  

In conclusion, as non-people, corporations have no moral claim to be taxed by rules that bend over backwards to be fair. Chasing fairness leads to complexity and the wrongful influence of thinking about ability-to-pay. Transparency and simplicity are far more important. Once new tax rules are enacted, there may or may not be a one-time adjustment in market value for a particular company. But, once made, all new purchasers of the company’s stock make their purchase with full knowledge of the new tax rules. Therefore, they have no basis on which to complain.

Put a few cocktails into a corporate CEO, and I bet he or she will admit the above scheme is more fair than the current tax on profits.

G-Pub

P.S. The above proposal is for corporations that conduct 100% of their business inside America. International corporations raise different issues. Bad news: the non-person known as Apple cannot be trusted to make patriotic decisions as to where to locate its employees. Good news: Japan can’t trust Toyota, either. American corporate tax and tariff policies should give both Apple and Toyota incentives to locate jobs in America.

A tax based on the geographic location of profits is doubly silly.

The federal government cannot control what corporations do overseas. It can control, however, access to what every company in the world wants — the ability to sell products and services to the American consumer. If you make it profitable for them to locate their employees in America, they will.