I general, I think our tax code is nuts, allowing deductions for interest, and not dividends. That creates a pro-debt bias in the tax code, which we are suffering from now. I would reverse it, and allow deductions for dividends, and not interest, which would create a pro-equity tax code.
Leaving that aside, though I think corporations should not be taxed, and individuals should be taxed more heavily, if you must tax corporations, do not create a separate tax accounting basis. There should be no social engineering through the tax code. Instead, tax corporations on their GAAP income. If there is some other figure that they highlight to investors, such as operating earnings, tax them on that.
A taxation method like this gets rid of two sets of games:
- The game of lowering taxable income below GAAP income.
- The game of boosting reported income above GAAP income.
It is far better for the nation as a whole to have one set of strict rules on taxation that are almost impossible to avoid that the Swiss cheese tax code that we have gotten post-Reagan. Discretion in the tax code allows the wealthy to avoid paying their fair share, regardless of what the tax rates are. Why do you think wealthy Democrats support increases in tax rates and estate taxes? Because they have clever ways of avoiding those taxes.
Again, I support true tax reform. But who else would support such a fair system, when politicians support unfairness to aid them in getting re-elected?
[...] David Merkel: "I think our tax code is nuts, allowing deductions for interest, and not dividends. That creates a pro-debt bias in the tax code." (AlephBlog) [...]
[...] Blog: “Our tax code is nuts, allowing deductions for interest, and not dividends. That creates a pro-debt bias in the tax code, which we are suffering from [...]
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Or combine the two goals into one. Tax corporations based on their amount of debt. So corporations with little debt pay lower rates than high-debt corporations.
Better yet, get rid of the corporate tax completely (gets rid of the second set of books), and instead tax dividends based on the leverage of the firm. So debt-free firms pay no (or little) taxes on dividends, high debt firms pay high taxes.
This is really only taxing dividends when they are used to effectively leverage the corporation. A debt-free company would pay no taxes.
Companies that legitimately need debt (fast growing companies, banks) won’t have a problem, as they simply need to scrap their dividend until their need for debt wanes.
[...] The tax code has got things all backward. (Aleph Blog) [...]
Agreed tax code is nuts – personal and corporate.
My preferred corporate tax is flat rate levied on gross revenue with the only deduction being labor costs up to some modest multiple of median wages.
Eliminates double books, eliminates bias to debt or equity in favor of a bias towards labor but not high cost labor. Doesn’t penalize capital equipment either.
Gad, I sound positively socialist, yeech.
Can’t believe what I am reading in the comments section:
* variable taxation based on debt etc eliminates every bank, building society, credit union etc – back to the stone age with that idea
* allowing companies to distribute income tax free (withholding taxes apply for non-US personal taxpayers) eliminates corporate tax distortions and no favouritism for debt over equity
Unfortunately, what this won’t eliminate is the implicit government guarantee that still exists for economically and socially important institutions in the event that they fail and the public purse has to be used to clean it up.
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“* variable taxation based on debt etc eliminates every bank, building society, credit union etc – back to the stone age with that idea”
Read the next sentence. Tax would be on the dividend. Credit Unions, building societies, etc would get along fine if they don’t pay a dividend.
For banks, there are three probable outcomes: banks deleverage, or stop paying dividends, or morph back into partnerships, where the firm is for the benefit of employees. Either way, I agree, credit availability will be greatly curtailed. That is a feature, not a bug.
As far as taxation goes, I think you want to move away from taxing profits and income as much as possible and move towards consumption.
The easiest way to implement this is to not tax corporations on income. When dividends are pulled out of the corporation, you’ll want to have a tax on money sent outside of the country to capture this. For money sent to citizens of the country, this should go into a bank account. When the money is pulled out of the account, if it is used for other investments, it should be tax free; if it is used for consumption, it should be taxed at a flat rate.
If corporations borrow money to grow their business, that will be done within the company and no tax benefits or penalties will accrue, so better business decisions will be made.