NCPA - National Center for Policy Analysis

Fundamental Tax Reform: Abolish The Corporate Income Tax

May 23, 2001

Treasury Secretary Paul O'Neill says he favors abolition of the corporate income tax, a goal of tax reformers on both the left and right for decades. This would do more to improve the Tax Code and the competitiveness of American businesses than any other single action Congress could take.

The corporate income tax is per se a double tax. Profits are first taxed at the corporate level (at rates of up to 35 percent) and again at the individual level when they are distributed as dividends (at rates of up to 39.6 percent).

This has a number of consequences:

  • It discourages saving and investment by taxing this form of income more heavily than others, such as wages and interest.
  • Since less saving and investment translates directly into fewer jobs and lower wages, many economists believe the ultimate burden of the corporate income tax actually falls on workers, not shareholders.
  • It encourages corporations to finance growth by going into debt, rather than issuing new stock, because interest payments are tax deductible, whereas dividends are not.
  • As a result, corporations are highly indebted, making them more vulnerable to bankruptcy during economic downturns.

Double taxation also encourages corporations to retain their earnings or buy back shares rather than pay dividends. And it acts as a kind of veil between a corporation's owners -- the shareholders -- and its managers. It allows the latter to abuse their positions at times.

In 1977, Americans for Democratic Action, a left-wing group, called for abolition of the corporate income tax, saying it was unfair to tax low-income shareholders at the same rate as rich shareholders. That same year, the New York Times echoed the ADA recommendation, as did the late Bill Simon, Gerald Ford's Treasury Secretary.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 23, 2001.


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