As for a positive argument in favor of corporate taxation - as an initial matter, I have to say that I find a lot of appeal in eliminating the whole "double taxation" issue and having individuals paying a single, direct rate, that can then give them a more transparent picture of what they're getting for their tax dollars.
The problem with this argument and its reliance on the "double taxation" concept is that eliminating the "double tax" results in this kind of transparency only if you either (i) have a direct flow-through of profits from corporations to shareholders and/or (ii) shareholders pay income tax on the capital gain they realize when they sell their stock.
To see this, imagine what happens in a world where corporations aren't taxed on their profits. Do they make timely dividend payments to their shareholders that can then be taxed? No, of course not. The Board retains that value. That results in an increase to enterprise and shareholder value, which isn't taxed, that likely would correspond to a higher sale price for shares in the corporation. If the shareholders then sell their shares, they would receive a capital gain on the price they originally paid, which would be taxed at a preferential rate in our system. So, they're basically avoiding income tax by converting it into capital gain. Note that, for public securities, the conversion becomes even easier - it'd be like a piggy bank. You buy stock for $100 today; a year from now the company has $10 attributable to your stock in profits that they retain; your stock becomes worth $110; you sell that stock and then buy $100 worth of stock. Then you have $10 of income and $100 stock, but you pay only capital gains on your "investment."
Now, I understand that you think that capital investment is so valuable that we ought to tax it at a preferential rate (though this has never been explained to me adequately), but the question is, here, whether we ought to recognize that $10 profit, which derives from income to the company - i.e., the difference between the cost of producing a product or service and the price received for selling it and not from capital appreciation - as a "capital gain" worthy of such a preferential rate.
Basically, it's tax structuring on the cheap. My clients are always looking for this kind of result - zeroing out corporate taxes would make it available to everyone.
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Date: 23/2/12 02:53 (UTC)The problem with this argument and its reliance on the "double taxation" concept is that eliminating the "double tax" results in this kind of transparency only if you either (i) have a direct flow-through of profits from corporations to shareholders and/or (ii) shareholders pay income tax on the capital gain they realize when they sell their stock.
To see this, imagine what happens in a world where corporations aren't taxed on their profits. Do they make timely dividend payments to their shareholders that can then be taxed? No, of course not. The Board retains that value. That results in an increase to enterprise and shareholder value, which isn't taxed, that likely would correspond to a higher sale price for shares in the corporation. If the shareholders then sell their shares, they would receive a capital gain on the price they originally paid, which would be taxed at a preferential rate in our system. So, they're basically avoiding income tax by converting it into capital gain. Note that, for public securities, the conversion becomes even easier - it'd be like a piggy bank. You buy stock for $100 today; a year from now the company has $10 attributable to your stock in profits that they retain; your stock becomes worth $110; you sell that stock and then buy $100 worth of stock. Then you have $10 of income and $100 stock, but you pay only capital gains on your "investment."
Now, I understand that you think that capital investment is so valuable that we ought to tax it at a preferential rate (though this has never been explained to me adequately), but the question is, here, whether we ought to recognize that $10 profit, which derives from income to the company - i.e., the difference between the cost of producing a product or service and the price received for selling it and not from capital appreciation - as a "capital gain" worthy of such a preferential rate.
Basically, it's tax structuring on the cheap. My clients are always looking for this kind of result - zeroing out corporate taxes would make it available to everyone.