Corporations should not pay taxes - shareholders should!

James Leroy Wilson makes a point about lowering the tax burden on corporations with which I reluctantly agree (only because, on its face, such agreement seems vulgar):

The blogger formerly known as Jane Galt wrote in 2002, "The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants." So according to this professor, it cost corporations $500 billion to pay the tax, though the government received barely $200 billion. And the tax code is much larger today than it was in 1998. While the professor's estimate may have been too high, there is undeniably tremendous waste of labor and money that the corporation could have used to grow their business.

Instead of this waste, we could simplify the system by letting the entire tax fall on the shareholders instead. After all, they are already taxed on their dividends, capital gains, and interest from their investments; these are part of their personal income taxes. The entire corporate tax structure does nothing but create a complicated and expensive layer of tax law on top of it on top of what shareholders are already paying in individual income taxes. In other words, when corporations pay taxes, that means less income for its shareholders, which means they effectively paid the tax anyway. Why don't we just have them pay it without the corporate tax rigmarole?

While I think his capital gains withholding scheme is perverse - why is getting a government bureaucracy involved any less wasteful than an accounting bureaucracy? - I like the idea of shifting the corporate income tax solely to shareholders. Such an approach would accurately reflect the concept that corporations are not themselves "people" or "citizens" but rather property - aggregations of assets and contracts. Corporations shouldn't owe taxes anymore than a car itself owes taxes. Only humans can own taxable property, so only human owners can pay taxes on the property.

While I think this principle of rejecting corporate personhood is worth acting upon in and of itself, there would be benefits for business as well. By raising the transaction costs involved with buying and selling shares, shareholders encounter an increased incentive to monitor management decisions to preserve share value, rather than simply selling when they don't like something. This would take discretion out of management's hands and make the corporation more answerable to the market in general and the owners in particular. I don't think this really solves the agent-principal problem, but it may make its pathology more apparent to people. It would be wonderful if the business community and the public at large could begin to see firms in a more balanced light, where their persistent flaws are not the result of regulatory failures but rather innate to their natures.

In fact, because the corporate form is a political privilege granted by the State and not derived from market forces, it's entirely just that shareholders pay for the privilege of doing business in the corporate form. Of course, I'd like to extend this attack on corporate personhood to its logical end by abolishing the statutory corporate form root and branch. This, however, would be a good half-measure, such as they go.

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Written on Saturday, September 29, 2007