Sunday, August 7, 2011

Eliminate the Corporate Income Tax

Last Friday's dismal economic news that only 117,000 jobs were created in June has capped off a grim week for the stock market and the U.S. economy.

Stock market plunges 513 points, the worst drop since 2008, on Mr. Obama's birthday no less.

The first two quarters of 2011 GDP growth were not even enough to keep pace with new workers entering the labor force, let alone get jobs for the nearly 20,000,000 who are unemployed.

So what's the solution?  QE3 from Mr. Bernanke at the Fed?  More "shovel ready" public infrastructure projects?  More Keynesian style government spending?

My solution is simple.  It's cheap, effective, and even politically feasible.

Eliminate the Federal corporate income tax.

But few American companies pay that rate.  Given an encyclopedia of tax law provisions (critics rightfully call them loopholes), many corporations pay no income tax at all with General Electric being a famous example.  Some estimates say more than half of all corporations pay no income tax.

The Federal corporate income tax is an extremely inefficient tax that raises only about $330 billion per year.  Completely eliminating the tax, including all the tax incentives, depreciation allowances, and the entire IRC devoted to corporations would cost ONE-THIRD of Mr. Obama's original stimulus package and just ONE-HALF of Bernanke's QE2.  Only 12% of all Federal revenue comes from the corporate tax and as the chart above shows, the tax relative to GDP has been declining for decades.

What would be the net effect of the elimination of this hated tax?

Wall Street would rally 2,000 points in two weeks.

Trillions of dollars of capital would immediately be released by companies that are currently hoarding the cash.  Tax rates are very predictable when set at zero.

Billions of expatriated profits would rush back into the United States for additional investment.  Why hold profits in Bermuda or Panama when you can bring them home without paying a tax?

Companies would begin using equity again to make investments and capitalize their balance sheets instead of debt.  Why should a tax code give an incentive to using debt over equity?

On this same note, eliminating the corporate tax instantly brings sanity to the taxation of dividends which have been double taxed at both the company and individual level for nearly a century.

Billions of dollars spent by companies large and small on tax avoidance can instead be used to build better products, give employees better compensation, and otherwise grow.  One of the few groups that would be hit hard by my idea would be CPAs and accountants.

So would lobbying firms in DC that work to get all those tax loopholes for their clients.  But these professionals will find much else to do in a world in generally increasing government regulation.  Getting rid of all the sleazy K Street lobbying for depletion allowances, accelerated depreciation schedules, and other such arcane accounting nonsense removes lots of room for political corruption and would restore some confidence in the political process.

As you can imagine, the Rachel Maddow wing of the Democratic Party would howl with betrayal.  Nancy Pelosi would be outraged by the rich not paying their fair share.

But most of America would not mind their crocodile tears.  The unemployed would be working.

Corporate America would be enjoying record profits and Wall Street would be in a bull market lasting years.

The Office of Management and Budget and the U.S. Treasury would be reporting growing tax receipts and falling budget deficits.

And Mr. Obama would be re-elected to another four years in the White House.  Unemployment could drop below 7% in just one year.

Republicans in the House would love my idea.  The Tea Party would find it orgasmic.

With Mr. Obama behind it, an elimination of the Federal corporate income tax could be passed with just a few conservative Democrats crossing the aisle in the Senate.

Will this happen?  Probably not.  But why not is my question?

Cheap, fast, and deadly effective seem to be all good political reasons to do something right.