0%: The correct corporate tax rate

New and returning members of a soon-to-be divided Congress might be tempted to heed the words of the late Sen. Russell B. Long (D-La.), who once summed up tax reform nicely: “Don’t tax you. Don’t tax me. Tax that fellow behind the tree.”

Giant, faceless corporations might seem like an ideal candidate to be that fellow behind the tree. After all, they can’t vote. But there is a problem: Regardless of whether you buy the argument that “corporations are people,” they don’t pay taxes. Only people pay taxes (and not just rich CEOs and investors).

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So who pays the corporate tax? Customers pay part of it in the form of higher prices. Higher prices mean corporations sell less and need fewer workers. Because the need for fewer workers means less demand for labor and thus lower wages, workers pay corporate taxes, too.

Higher prices also mean some buyers will be priced out of the market. If so, some transactions will not occur that otherwise would have — to the detriment of buyers and sellers alike. 

And yes, business owners and stockholders pay corporate taxes in the form of reduced profits, smaller dividends and lower stock prices. Stockholders include just about anybody who participates in a public or private pension plan, so it’s not just the wealthy. 

A key feature of the Tax Cuts and Jobs Acts of 2017, the first major tax overhaul in decades, is a permanent lowering of the federal corporate income tax rate from 35 to 21 percent. That’s good news, but does it go far enough? Why not just eliminate the corporate tax altogether. 

Many profitable corporations already pay little or nothing in taxes. Who can blame them? The managers of a corporation have an ethical duty to act in the best interests of those wealthy and not-so-wealthy stockholders who own it.

Firms spend time, effort and huge sums of money to legally reduce their tax bills. In 2011, General Electric (GE) famously filed a 57,000 page federal tax return. Its total tax bill? Zero.

If many corporations are already effectively paying nothing in taxes, why bother with an official tax rate? It comes down to resources. With a zero tax rate, corporations would not need to scour the tax code (and the world) for loopholes or prepare millions of pages of tax returns. Think of all the talented lawyers, accountants and financial analysts who could do better things with their time.

Another approach — closing tax loopholes so corporations can’t avoid paying — is easier said than done. The problem, as Sen. Long also observed, is that “a tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”

Abolishing the corporate tax completely and permanently closes tax-related loopholes and ends the never-ending efforts to lobby for them.

Moreover, it’s not clear that the federal government pulls in enough money from the corporate income tax to make up for the economic distortions it creates. This year, the IRS will collect about $225 billion in total corporate taxes, which is about $700 per person, so the tax doesn’t raise enormous sums. 

In broader terms, taxing income of any kind is a bad idea. It’s smarter to tax consumption. Focusing on consumption means taxing what we choose to spend without penalizing us for what we’re able to earn. In this way, consumption taxes promote saving.

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Another reasonable guideline is to broaden the tax base and lower the rate. High tax rates make tax avoidance (and evasion) more profitable and prevalent — especially by the rich, who have the motivation and resources. Low rates lead to less economic distortion.

Putting these elements together, a small, revenue-neutral consumption tax — like a national retail sales tax —broadens the base using a lower rate and would be more reliable and less damaging than a corporate income tax. 

Finally, remember that when we tax something, we tend to get less of it. So, when we have the choice, it makes sense to tax things we do not like. Air pollution and snarled traffic are two things that we might want to tax.

These are just a few examples of changes that would create a more equitable and less damaging tax system. We are confident Congress can find plenty of other ways to tax us. Our representatives just need to look behind the right tree.

Bradford Jordan is professor of finance and holder of the duPont Endowed Chair in Banking and Financial Services at the University of Kentucky. Thomas Miller is professor of finance and holder of the Jack R. Lee Chair at Mississippi State University and a senior affiliated scholar with the Mercatus Center at George Mason University.