Repeal and replace the tax on corporate profits
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The U.S. corporate income tax wastes resources: avoidance distorts business decisions, compliance imposes administrative costs, and very interested parties fight vigorously over its details. Its complexity enables some profitable corporations to avoid taxes altogether and it increasingly provides a smaller share of federal revenue, falling from about one-third in the 1950s to about a tenth today. Its complexity obscures transparency and provides opportunity for various interests to seek and obtain favorable treatment. Rather than tinker with the rates, deductions, or credits to “reform” the current tax, why not repeal it entirely and replace it with a tax on corporate value?

The current market value of U.S. publicly traded corporations is about $25 trillion. An annual 1.5 percent tax on capitalized value would generate annual revenue of over $375 billion, somewhat more than the current revenue from the corporate profits tax. It would operate as follows.

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First, all U.S. publicly traded corporations would average their capitalized value over all trading days during the tax year. Doing so would require a few accountants rather than an army of tax lawyers. The tax liability for the year would be 1.5 of the average value.

 

Second, individuals holding privately traded corporate stock or stock in foreign corporations would also pay 1.5 of the value of these stocks in personal income taxes. They would state their estimates of the value of the stocks. When they sell these stocks, they would pay a capital gains tax only on the difference between the stated value in the last tax year and the value upon sale. Brokers providing mutual funds or other portfolios of stock of foreign or privately traded companies would pay the tax for individuals.

Readers may recognize that the corporate value tax is essentially a tax on capital. Most households already pay such a tax–local property taxes on their homes. The corporate value tax would effectively place the same aggregate burden as the current profits tax, but do so in fairer, less distorting, and more transparent way.

As with any radical change, there would be some losers in the short run. Publicly traded corporations that currently play little or no profits tax despite actual profitability would be forced to pay some tax. Progressives who seek to induce corporate behavior by changing the way profits are measured through deductions or taxes are offset through credits would lose a policy lever. Corporate tax lawyers would find their human capital substantially diminished.

Nonetheless, there would be gainers as well. Corporations would no longer need to take account of tax avoidance in making their business decisions–manipulating corporate value would be much less attractive than manipulating taxable profits. Compliance costs would also be greatly reduced. Perhaps the Trump administration would realize that this change would eliminate the incentive for corporations to hold profits overseas, thus setting the stage for a large infusion of capital back into the United States that would contribute to a timely spurt in economic growth. Both members of Congress and the administration might find its adoption no more difficult than reaching agreement on changes to the profits tax.

More generally, the transparency of the value tax would greatly reduce the opportunity to lobby for special treatment, thus helping to “drain the swamp.”

David L. Weimer is the Edwin E. Witte Professor of Political Economy at the University of Wisconsin-Madison.


The views expressed by contributors are their own and are not the views of The Hill.