Corporations should not be taxpayers. If all companies were treated like Subchapter S corporations, overall U.S. tax collections would increase and tax dodging would decline.
Funny how you can write and write about an issue, but until it affects one of the U.S. corporate darlings, no one wants to hear about it.
You can argue endlessly about how many U.S. corporations take advantage of the current U.S. tax laws that allow them legally to move profits offshore, which allows them either to defer or eliminate U.S. taxation. You can also take the so-called “moral high ground” and castigate people like Donald Trump for using the same tax laws.
Then we hear that the reason the poor corporate darlings like Apple do this is because the U.S. corporate tax rate is the highest in the world. It has been suggested that we lower the tax rate paid by such corporations. It is said that this will reduce the incident of corporations pushing their profits offshore.
Sounds convincing, but that would not solve the problem. The truth is that the tax code is written in such a way that it begs for learned tax professionals to find ways to circumvent it. The real problem is the very idea of corporate taxation.
I recommend we lower the tax rate to zero.
Corporations should not be taxpayers. Rather, each and every shareholder should pay taxes on his share of the respective income of the corporation whose stock he owns. We have such corporations now. They are called “Subchapter S Corporations.” They pay no tax. Each shareholder receives a form K-1 (similar to a form 1099), which he or she uses to prepare individual tax returns.
We now have the technology to expand Subchapter S status to all corporations, public or private. Think of it! No more tax avoidance analysts paid by Apple, Pfizer or the like. Corporations would be pressured into increasing their dividend rates to cover the tax liability of their shareholders. U.S. citizen shareholders of foreign-based corporations would simply have that income added to their personal tax return at the highest personal rate. And here is an added bonus:
Under current U.S. tax law, Section 1441, foreign shareholders would have their taxes automatically withheld at 30%. These laws are called “withholding at the source.”
Again, this law already exists for S Corporation shareholders and non-resident alien partners of U.S. Partnerships. Result: much less offshore tax avoidance.
By my calculations, this would actually raise overall tax revenue collected. Using an IRS sampling report for 2012, corporations paid an effective 11%, whereas individuals paid an effective 13%. Therefore, by transferring the taxpaying to the individual and from the artificial corporate person, the U.S. would increase revenue collected from “corporate” income by 22%.
A learned economist, Laurence J. Kotlikoff, wrote an article on this subject in the New York Times on Jan. 5, 2014. He said: “... Eliminating the United States' corporate income tax produces rapid and dramatic increase in American investment, output and real wages, making the tax cut self-financing...”
Finally, for those who offer their advice regarding the stock market value or capitalized value of public corporations, this change would represent a challenge. Stock analysts and advisers would have to remove taxes from their Weighted Average Cost of Capital valuation formulae. They will be confused by the sudden increase in corporation value because corporations would no longer have the drag of taxes on their income statements. Think of it: Corporations would no longer have to make tax-based decisions.
Too much time and money is wasted on pinning corporate goals against the goals of individuals. With my proposed changes, they would be one and the same.
Stephen Musco is a Sarasota CPA and owner of Stephen M. Musco & Co., PA.