One option that President Biden mentioned to fund his infrastructure proposal is to increase corporate taxes from 21% to 28%. By the time the Trump tax cuts were passed in 2017, they were 35%.
The public seems to like corporate taxes a lot more than income taxes, even if the proposed increases would affect less than 1% of our population. I suspect it’s because corporate taxes are supposed to get these wealthy companies to pay their “fair share”. This is highly misleading.
Corporations are not “wealthy”. They generate wealth for their employees and shareholders. Second, an increase in corporate tax rates generally motivates companies to increase their prices in order to maintain the desired level of after-tax profit. That works well when competing against other US companies in the US. When they compete overseas it becomes problematic as they have to choose whether to be less competitive or get lower profits.
President Biden talked about all of the big corporations that didn’t pay taxes at all, but didn’t mention why. Note that if the corporate tax rate was 35%, the effective tax rate paid would be 18%. To be clear, corporate taxes are related to profit before tax. This income is calculated as follows:
- Add-in: Sales, ie the total sales of all products
- Subtract: cost of goods sold – how much it costs to make the products; Expenses, costs associated with marketing and selling the products, design / development of the products, overheads of a manufacturing organization, general administrative costs such as personnel and IT Other, depreciation due to investments in equipment and capital goods, interest expenses (less interest income)
- Difference: pre-tax profit (profits)
This result is taxed at the current rate, which is currently 21%. Given that every company is taxed at the same rate, why was the effective tax rate only 18% while the corporate tax rate was 35%?
The answer is that for many years Congress has benefited certain industry segments, often referred to as “loopholes”, which have acted as tax rebates for companies in those segments. If we only removed these loopholes, the effective tax rate would be higher now (21%) than it was when the corporate tax rate was 35%.
I have a better idea. Let’s stop taxing corporations at all and tax the wealth they make at higher rates. With much higher after-tax profits, companies would have a number of options:
Lower prices to be more competitive worldwide.
Pay higher salaries to employees to reduce turnover.
Pay higher dividends, which benefits shareholders.
Buying back shares of their stocks, which increases earnings / stock and drives stock prices higher, is also a benefit for shareholders.
How would we compensate for the loss of tax revenue from the abolition of corporate taxes?
In case 2) those on higher salaries would pay higher income tax. Perhaps another income bracket above $ 1 million should be added; how about 42%?
In case 3), increased dividends are taxed as regular income.
Case 4) is unique in that higher share prices can be used by shareholders to make profits by selling some or all of their shares. If they hold these stocks for a year or more, the gains will be taxed as long-term capital gains capped at 20%. For example, if you made $ 2 million in long-term capital gains, your tax would be $ 400,000 – 20% of the profits. This tax rate is the same as if you had $ 295,000 on taxable income. This is a significant discrepancy that favors the very wealthy who could make millions of dollars in long-term profits annually but are taxed at the same rate as someone who earns a salary and makes about $ 300,000.
Increasing corporate taxes makes no sense; it will only increase prices and make American companies less competitive.
Taxing the wealth created by companies is a far more sensible approach.
Rich Belzer served as director of federal marketing for a NYSE-listed computer company, and then served as an executive at two high-tech companies listed on NASDAQ. He moved to Bend to join Columbia Aircraft where he became VP of Worldwide Sales.