Square-Off: What Kind of Corporate Tax Is Best?
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 th ..
Philip G. Cohen
What kind of corporate tax is best?
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?
We cannot design the best corporate tax system unless we can agree on what “best” means. Determining optimal tax policy — what should tax rates be, who should bear what burden, what activities should be favored or disfavored — has been at the center of the tax debate for decades. Thus, figuring out what we want to achieve takes us a long way toward ultimately determining which system of corporate taxation is best.
It wouldn’t surprise me if you’re thinking I’m overcomplicating matters, because isn’t the goal of the tax code to raise money? Yes, the primary purpose is, and always has been, to collect revenue to fund our government. But 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. So in choosing the design of a tax system, we are likely forced to choose, or at least emphasize, one interest over the others.
Some have suggested the best type of corporate tax is no corporate tax at all. Specifically, they contend, a corporate tax system results in double taxation of the same income, at the corporate level and again at the shareholder level. If the desired policy objective is to tax all income only once, then a corporate integration system might be viewed as best. There are a number of corporate integration design options, including a dividends-paid corporate tax deduction that is being contemplated in the Senate.
If neutral application of the tax law is the goal, a value-added tax (VAT) might be a preferred solution. One recurring complaint about the current corporate income tax system is that it creates a distortive effect on business decisions. That is, business decisions are too often influenced by tax outcomes. A value-added tax, however, is generally perceived to minimize the tax aspect of business decisions.
On the other hand, if fairness is viewed as the hallmark of a good tax system, income taxes may be viewed as optimal. A central feature of the income tax is that the more income one earns, the more one pays. This concept of progressivity applies in both the individual and corporate contexts. Another feature of the income tax system is that it is more easily adapted to encourage or discourage specific behaviors through the use of tax credits, deductions, and other preference items.
Finally, many have argued that the best type of corporate tax is one that maximizes economic growth. That argument suggests that the tax code has a role to play in increasing the rate of growth by overhauling the current system in favor of those policy choices most likely to result in increased growth across the economy. The recently released House Republican tax reform “blueprint,” a hybrid between an income tax and a consumption tax, places particular emphasis on economic growth. The blueprint seeks to trigger favorable economic effects through a lower corporate rate, a territorial tax system, and full expensing for capital investments.
But in the end, the type of tax system we employ, be it income tax, VAT or otherwise, is less important than why we employ it. The system itself is merely a means to an end, and establishing consensus on that end is the most critical part of determining what corporate tax is best. Until we have achieved a consensus on the role of our tax system, the question of design will have to wait.
John Gimigliano is principal-in-charge of Federal Legislative & Regulatory Services in the Washington National Tax practice of KPMG LLP. He is based in Washington, D.C.