Tax

Square-Off: What Kind of Corporate Tax Is Best?

Our three debaters tackle the fundamental issues regarding how the federal government taxes companies.
David KatzJuly 13, 2016

With the Democratic and Republican Presidential conventions coming up soon, the perennial question of what to do about corporate taxes has predictably entered center stage.

Gary Johnson, the Libertarian candidate for president, wants to abolish corporate and personal income taxes, substituting a single consumption tax to pay for all federal government costs. An American Enterprise Institute proposal would link corporate tax liability closely to where shareholders live. Proposals to broaden the corporate tax base to pay for lower rates or to eliminate taxes on corporate repatriations have lingered in Congress for years. Which system of corporate tax is best?

That question was posed to three experts for our July CFO Square-Off opinion forum, and to answer it, they went back to basics. “At the risk of appearing to dodge the question, I would argue that the answer depends on your answer to a more fundamental question: What do we want our tax system to achieve?” writes John Gimigliano, who heads up federal legislative and regulatory services in the Washington national tax practice of KPMG.

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Acknowledging that the goal of the tax code has been to collect money to fund the government, Gimigliano says, however, that “that goal can be achieved in myriad ways and is subject to many competing interests. Those competing interests, such as growth, equity, neutrality, revenue collection, to name a few, are often at odds with one another.”

Arguing for the necessity of maintaining enough revenue to pay for the needs of middle-class and low-income people, Robert McIntyre, the director of Citizens for Tax Justice, decries current proposals aimed at slashing or eliminating corporate tax.

“In the last few years, more so than any other time in the last generation, policy makers and the American public are talking about the widening chasm between the very rich and the rest of us. Cutting the corporate tax is the antithesis of addressing this problem, as the corporate tax is a progressive tax that mostly falls on the best-off Americans (who own most of the corporate shares),” he contends. “The decline of the corporate tax over the past decades is one of the major causes of excessive income inequality.”

As for out-and-out elimination of corporate income taxes, that “would create a loophole you could drive a truck through. Anyone who currently earns business income reported on individual tax forms would suddenly discover that they could call themselves a corporation and zero out their income taxes,” McIntyre adds.

An even fundamentally bigger problem with repealing corporate taxes “is how to make up for the lost revenue. The inevitable answer is that the rest of us will pay more,” he concludes.

Yet if reform is to come, it should come via evolutionary rather that revolutionary means, reasons Philip G. Cohen, a retired vice president of tax and general tax counsel at Unilever United States, who is currently an associate professor of taxation at Pace University’s Lubin School of Business.

“I’m wary of panaceas promised from politicians, including replacing the corporate income tax with a value-added tax (VAT) or quasi-consumption tax. We should resist taking extreme measures that could make our budget problems as bad as those of Greece and create other havoc in our economy,” writes Cohen.