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Repeal the Corporate Tax

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Why not repeal the corporate income tax? Everyone’s worried about falling stock values, so let’s remove one of the big burdens on corporate profits: the corporate income tax. We shouldn’t do this as a short-term quick fix. The repeal should be permanent.

What? you’re saying. Let those dirty corporations get off tax-free?

Such a reaction would only demonstrate woeful economic illiteracy. As has been wisely said, businesses don’t pay taxes. They collect them. A corporation is not an entity. It’s a relationship among large numbers of people. If you tax “it” you are really taxing those people. The people who pay the tax may be different from the ones you may think are paying it. We can’t say exactly who pays how much of the corporate tax, but we do know that it hits stockholders, employees, and consumers. Most advocates of the corporate tax probably don’t intend to hit the company’s employees and consumers. But they are paying. Since the profits taxed away can’t be invested in capital improvements that raise employee productivity, wages cannot climb. And since those profits can’t be invested in new, better, and cheaper products, consumers pay more for goods than they would otherwise. In both cases, the corporate tax is a real tax on people not usually thought of as its targets.

What about the stockholders? First, stockholders already pay the personal income tax. This includes a tax on dividends and capital gains when they sell their shares for a higher price than they bought them. As you can see, the corporate tax is part of the government’s unconscionable double-tax scheme. Talk about “greed”! Why do the politicians need to tax something twice?

Here’s how it works. The company pays the corporate tax on its profits. If it then distributes the shrunken after-tax profits as dividends, the stockholders pay again when they declare the dividends on their income-tax returns. Where’s the justice?

But those fat cats should pay more taxes, shouldn’t they? Leaving aside the unflattering envy underlying such a remark, we should recall that most stockholders are not terribly wealthy. Half the people in America own stocks, many through their employer and union pension plans and 401(k)s. When profits are reduced through taxation, less money is left with which to enhance companies’ value through investment and new products.

Last year, the corporate tax collected $191.6 billion. That’s money that could have been producing better goods and higher-paying jobs. Instead, the government very likely wasted it, transferring it to those who did not earn it and squandering it on unconstitutional and meddlesome programs.

This is the other side of the tax. First the government takes the money from those who earn it. Then it spends it in ways that do real harm. For example, it uses the money to finance the regulatory regime, which stifles productivity and retards growth in living standards. It would be bad enough if the government just took the money. That it then uses the money to do harm only adds injury to insult.

Unsurprisingly, as the markets skid, all the politicians can talk about is new regulation. This has many reasons. Politicians are devotees of the state. For them, any crisis requires government action. Their definition of “crisis” is: that which requires a government solution. Moreover, members of the House and a third of the Senate are facing reelection in November and they are panicked about being called “do-nothings.” So they are ready to do anything — not because it will fix something, but because it will play well back home in the campaign season. That should make everyone nervous. As an anonymous 19th-century New York judge said, “No man’s life, liberty and property are safe while the legislature is in session.” How true.

President Bush isn’t immune from this influence, even though he doesn’t face reelection until 2004. He’s said he’s ready to sign whatever business-regulation bill that Congress passes. I’m sure that sent a wave of confidence through the trading floors.

There is no way we can tax and regulate the economy out of its doldrums. It needs the weights removed. Let’s repeal the corporate tax and say No to new regulations.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.