15 June, 2011

What Do You Call A 20% Reduction In The Corporate Tax Rate?

I know what you’re thinking. “Oh boy, Chris is going off on taxes again. Where’s the snooze button?” But if you want to fix our economy, with a lasting fix, it’s going to take fixing our taxes.

Anyway, back to the question. What DO you call a 20% reduction in the corporate tax rate?

Liberals call it a “fantasy”. I call it a good start.

Former Governor Tim Pawlenty (R-MN) released his economic plan last week. Neal Boortz has a good summary.

As we gear up for the Republican debate tonight, here’s a look at Tim Pawlenty’s economic plan that has some liberal’s tight-chested.  He believes that he can implement a national economic growth goal of 5%.  Here’s how:

  • Take the business tax rate all the way down to 15% from 35%
  • Get rid of all the deductions and quit taxing foreign earnings of American companies
  • Make small-business S-Corps or LLC partnerships eligible for the new low corporate rate
  • Simplify our income tax to two rates of only 10 and 25%
  • Abolish taxes on capital gains, interest, dividends and estates
  • Sunset all economic regulations
  • Apply a "Google test," whereby if you can find a federal government good or service on the Internet, the federal government doesn't need to run it.

I’m on board with all of this. I’d prefer the FairTax over his two tiered flat income tax, but I’m not a purist. Right now as long as it cleans up the tax code I’m happy. His elimination of investment taxes is fantastic. The part about elimination of deductions appears to only apply to the corporate tax and not the individual, which is unfortunate, but again, it’s a good start. The “Google test” is a terrific idea.

But…about that corporate tax rate. 15% is still at least 15% too high. I don’t agree with the people who say we need to eliminate corporate tax breaks. We just need to give them all to everyone. Let me be blunt. Corporate taxes accomplish no good purpose. All they do is obfuscate the tax code unnecessarily and prevent business from using their resources to produce their goods and services. They are always a net drain on business productivity.

I’ve said this before, and I’ll keep saying it. Businesses don’t pay taxes. Never have. Never will. They pass the tax burden on to their customers in terms of higher prices, their employees in terms of lower wages and benefits, and their stockholders in terms of lower dividends. There are conflicting studies on which of those three groups tends to get stuck with the highest percentage of the bill, but in the end it doesn’t matter. All three of these are a drain on the economy.

  1. Higher prices means fewer goods and services are sold.
  2. Lower wages and benefits for employees means they won’t buy as many goods and services from other companies.
  3. Lower dividends means less investment or reinvestment. Less capital for businesses means less investment in their future in terms of research and personnel.

Here’s something else I’ve been saying since 2008. You want to end this “economic downturn” we’re in (I can’t call it a recession right now…not until it’s formally declared a recession again), then eliminate the corporate income tax. Yes, you have to do a little more work than just that or every person in the country will immediately incorporate, but compared to reinventing health care in the United States, this is easy. Do just this one thing and we get to positive and sustained economic growth starting almost immediately. Yes, it really is that easy.

I linked this article by Megan McArdle at the top of the page, but it’s worth re-linking. She goes into far more detail about how corporate income taxes negatively effect business growth and investment. She also examines why progressives should be for it as well. Read the whole thing, but I’m just going to grab her last point, because it brings up something I haven’t mentioned even tangentially.

Without the corporate income tax, a lot of the incentive for lobbying would go away  Not all of it, by any means--I am not trying to paint some halcyon future here.  But an enormous amount of effort goes into lobbying for tax laws, and politicians often reward favored constituent businesses with little sweetheart fillips to the tax code. Conversely, apparently neutral changes to the tax code often turn out to be excellent ways to hamstring your competition, particularly small businesses who cannot afford a huge tax department.

Want to get corporate money out of politics?  Want to erode the power of the Chamber of Commerce?  Take away one of their primary motives to get involved.

We’ve been hearing a lot about corporate money in politics recently and about crony capitalism from both sides of the aisle. If you really think that either or both of these are problems, then you should be in agreement with me about corporate taxes.


  1. This comment has been removed by the author.

  2. My first thought was "a good start", and then I thought, "a mediocre start". But now I realize that you mean a 20-point reduction, not a 20% reduction (which would be 7 points, from 35% to 28%). Reducing the rate by 20 points, from 35% to 15%, is indeed a good start!

    (Sorry, I had to correct my math.)

  3. Good point. I should have been more clear on that.