Tax Foundation Suggests US Corporate Tax Reforms
In a new paper, the Tax Foundation has recommended that the United States should reduce corporate tax rates and amalgamate corporate and shareholder taxes.
The TF points out that the US loses about 60,000 corporations per year, with about one million having been lost since the last reform of corporate taxation in 1986. More businesses have been structured as “pass-through” entities, whose profits are taxed at their owners’ individual tax rates, which can be lower than the corporate tax rate. Such structures are favorable as they avoid double taxation on shareholders, by enabling shareholders to avoid capital gains and dividend taxes.
The paper says: “More than 60 percent of US business profits are now taxed under the individual income tax code, rather than the corporate tax code, which explains why the US collects a relatively small amount of tax revenue from corporations despite having the developed world’s highest corporate tax rate.”
The TF concludes that “blaming low corporate tax revenue on corporate ‘loopholes’ does not withstand scrutiny. Besides, much of the lost corporate tax revenue is offset by increased individual income tax revenue from pass-through businesses.”
However, there are concerns that, while “this kind of self-help tax reform is beneficial to the overall economy because it lowers the tax burden on business investment, something is nevertheless lost.”
It notes that pass-through businesses “do not offer the same ability to invite investment from thousands of shareholders or easily transfer shares. That means the decline of the traditional corporate sector represents an economic distortion that is hobbling American industrial capacity and job growth.”
The solution for lawmakers is therefore said to be “a single layer of tax” across business types, while also reducing corporate taxes, and integrating the corporate and shareholder taxes to avoid double taxation, “much as the rest of the developed world has already done.”
