NCPA - National Center for Policy Analysis

Benefits Of A Corporate Flat Tax

April 17, 2002

Since corporate income taxes are passed on to consumers, and the money they spend trying to lower their tax burdens creates a considerable drag on the economy, the corporate income tax rate should be slashed to zero, says former American Express chairman Harvey Golub. That would free up investment capital, promote growth and reveal the real cost of a tax "someone else pays."

Since that is unlikely, says Golub, Congress should eliminate almost all of the corporate tax code and create a single tax rate of, say 35 percent, paid on operating income -- earnings before interest and taxes. This would generate the same total tax revenue, but at a much lower economic cost.

Golub says the current corporate income tax is unfair:

  • Corporate income taxes are one of the largest cost items for most companies, averaging fully half of reported after-tax income.
  • The capital expended on corporate income taxes is completely unproductive.
  • Due to the extraordinary lengths corporations go to in order to reduce the taxes they pay, the corporate tax burden in the U.S. averages about 35 percent of operating income, but many corporations pay little or no taxes while others pay up to half their income.

The difference in tax burdens affects their market value. For example, if two corporations have operating income of $10 per share and one pays 35 percent in taxes and the other 25 percent, at a price/earnings ratio of 20 one company is worth $130 per share and the other $150.

However, with an across-the-board 35 percent tax on operating income, corporations would find it difficult to reduce taxes without reducing net income, share prices and the value of their stock and stock options. The economy would benefit by eliminating a huge overhead burden.

Source: Harvey Golub, "Corporations Deserve a Flat Tax," Wall Street Journal, April 17, 2002.

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