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| Topic | Politics Containment Topic 363: SEC Speed |
| masterplum 02/05/21 2:37:00 PM #337: | https://www.econlib.org/library/Enc/CorporateTaxation.html Most economists agree that the corporate income tax causes two major inefficiencies. First, it penalizes the corporate form of business organization because income is taxed first at the corporate level and again when paid to stockholders as dividends. A traditional justification for singling out corporations is that they receive special benefits from the state and should pay for them. There are two problems with this rationale: first, if it were true, then all corporations, not just profitable ones, should pay; second, current corporate tax rates seem disproportionately high for this purpose. But the fundamental problem with this traditional justification is that it harkens back to the eighteenth century, when a corporate charter carried with it state-granted privileges such as monopoly power or exemption from specific laws. Today, corporations are created by private contract, with the government acting merely as registry and tax collector. Recent experience shows this disincentive to the corporate form of organization at work. U.S. companies with thirty-five or fewer shareholders can elect what is called Subchapter S status. So-called S corporations have taxable income passed through to the tax returns of the owners, as in a partnership, instead of paying the corporate income tax. In the five weeks surrounding year-end 1986, after enactment of the tax reform bill, which raised the effective rate of corporate taxes, 225,000 companies elected Subchapter S status, compared with 75,000 for all of 1985. The second major flaw in the corporate income tax is that it misallocates capital by favoring the issuance of debt over equity because interest payments are tax deductible, while dividend payments are not. This favors investments in assets more readily financed by debt, such as buildings and structures (which can be used for many purposes, and thus are more easily used as collateral for loans) over investments more logically financed by stock, such as specialized equipment or research and development. In addition, the deductibility of interest payments favors established companies over start-ups because the former can more easily issue debt securities. Some economists, focusing on this last phenomenon, have argued that this feature makes the corporate income tax a tax on entrepreneurship. During the 1980s, U.S. corporations issued huge amounts of new debt. Corporate bondsoutstanding increased from less than $500 billion in 1980 to $1.4 trillion in 1988. At the same time, many corporations reduced their outstanding equity by buying back their own shares. The increased emphasis on debt financing was much more pronounced in the United States than elsewhere. In 2003, Congress took a step toward leveling the playing field by creating a special top tax rate for dividend income of 15 percent (previously, it was taxed as ordinary income at rates as high as 38.6 percent). --- ... Copied to Clipboard! |
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