🔒The liberal’s case for eliminating federal corporate income taxes

The fight for the Democratic nomination for president has included some wildly progressive policy prescriptions.

The most notable ones include Sens. Bernie Sanders’ and Elizabeth Warren’s “Medicare for All” and Andrew Yang’s “Universal Basic Income,” aka the freedom dividend.

These policies and others rely on dramatic changes in federal spending priorities as well as changes in how these massive expenditures would be paid for. A common theme of the progressive candidates is to increase taxes on the wealthy.

Without offering an opinion on these specific policies, or how they would be paid for, the case can be made that part of the liberal platform should include the elimination of the corporate income tax.

But before you choke on your latte, let me explain.

Corporate income taxes paid to the federal government in FY 2019 amounted to only $225 billion, less than 7 percent of all federal tax revenues. Over 85 percent of the $3.4 trillion in federal tax revenues are paid in the form of personal income, social security and payroll taxes.

While $225 billion is a lot of money, eliminating this source of federal tax revenue would hardly be missed, and more importantly can easily be made up. So, before Wall Street breaks out the caviar, let me explain.

Conservative economists going back to Milton Friedman often argued for the elimination of corporate taxes based on the fact that corporations are not people, and only people can pay taxes.

Progressives agree that corporations shouldn’t have political rights. The Supreme Court’s Citizens United decision is wildly unpopular in liberal circles because the case grants corporations rights usually associated with “natural” citizens.

The tax treatment of corporations depends on the type of legal organization. Corporations come in different forms — C-corps, S-corps, B-corps, LLCs, LLPs, etc. It is the C-corporation whose taxes should be eliminated. The profits and retained earnings of C-corps are legally the property of shareholders. We should tax shareholders, the actual people, and not the corporations they own.

In 2018, corporations reported total profits of $2.3 trillion. By comparison total GDP was $19 trillion and personal income represented about $15 trillion. By eliminating the corporate income tax and taxing shareholders of C-corps — the way shareholders of S-corps, or other pass-through companies are taxed — the federal government would more than make up for the loss of revenues from corporate income taxes, and simultaneously eliminate hundreds of pages of corporate tax regulations and the armies of corporate tax attorneys and accountants that support this inefficient and ineffective tax system.

Corporations currently have an average effective tax rate of 10 percent compared to an effective tax rate on personal income of 17 percent. Taxing shareholders at 20 percent of corporate profits would generate over $450 billion, about twice the amount generated by the current corporate income tax.

I know it feels good to “stick it to” corporations, but if the goal is generating revenue for the federal government in an efficient manner, the elimination of the corporate income tax is the way to go.

Additionally, taxing corporations has led to some economically perverse incentives and decisions. Corporations reported having over $535 billion in retained earnings in 2018. But this amount does not include the amount of profits corporations use to purchase their own stock.

Since the Trump administration’s corporate tax cuts, corporations have plowed over 70 percent of their profits into stock buybacks, which create more wealth for senior corporate executives and large shareholders. This does not make companies more competitive, more innovative or more entrepreneurial.

If shareholders were taxed on their pro-rata share of corporate profits, I doubt that corporations (with independent boards of directors) would be investing so much wealth in their own shares.

Taxing shareholders on their share of profits is the way to change the incentives, generate more federal tax revenues, eliminate waste, simplify the tax code and get corporate leaders focused on improving their businesses and not being distracted by short-term stock price changes.

Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and director of the Center for Innovation and Entrepreneurship at the Quinnipiac University School of Business.