Bryan Caplan  

Return to Neptune, II: The Corporate Income Tax

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While we're on the subject of differential tax treatment, I don't think Rod or his critics ever mentions the notorious double taxation imposed by the corporate income tax.  This tax matters less than it used to, but the U.S. federal government still gets 15% of its revenue from it.  That's about $375 B.  Except for the year of the bail-out, it would be very hard for all corporate welfare combined to approach this figure.

Of course, if I'm right about tax incidence, the main effect of the double taxation of corporate income isn't that corporations suffer.  The main effect, rather, is that we discourage corporations when they are more efficient than other forms of organization.  This reduces productivity, which in turn hurts consumers.

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COMMENTS (5 to date)
floccina writes:

Am I wrong to think that businesses can aviod the corporate income tax by being a partnership?

Bryan Caplan writes:

Nope, you're right.

Les writes:

A corporation can avoid federal corporate income tax by becoming a partnership or sole proprietor, as the case may be. It will then forfeit limited liability.

Alternatively, a C corporation can avoid federal corporate income tax by becoming an S corporation (if eligible) which is taxed as a partnership but which retains limited liability.

The normal person's mutual fund, 401k, etc will be invested in public companies. No public company can avoid the corporate income tax regime.

Even the rare publicly traded partnership pays an entity level tax.

kazander writes:

I think Les' comment highlights what I see as a decent rationale for imposing the corporate income tax: owners of corporations are given limited liability. Limited liability isn't something the government has to grant. It seems to be the case that granting limited liability leads to socially desirable outcomes, given the importance of corporations to our economy, but surely limited liability isn't something the government should just give away for free. And while we might argue about the optimal level of the corporate income tax (or maybe propose an alternate way of charging for the privilege of limited liability), I think the "double taxation" meme serves to obscure the issue by implying that there is no legitimate reason for the corporate income tax other than government rapacity.

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