Subject: TAXATION OF CORPORATE PROFITS TO SHAREHOLDERS Comment: The corporate tax should be eliminated; all corporate profits should be taxed to the shareholders who receive dividends and capital gains. The corporate tax is not progressive: a small investor who holds one share of a company is taxed at the same rate as a billionaire who holds millions of shares. The corporate tax also taxes those shareholders which are supposed to be tax-free or tax-deferred, such as charitable foundations and IRA's. It adds complexity and cost to the operation of the business, thereby placing American companies at a disadvantage in the global competition against foreign companies if the latter are domiciled in a nation with a lower or non-existent corporate tax. Executives make decisions which are sub-optimum from a business perspective but possess tax advantages. For example, there is an incentive to pay interest, but a disincentive to pay dividends, becuse the former are tax-deductible but the latter aren't. This encourages businesses to borrow, increasing leverage and risk. Some businesses engage in complex tax-avoidance schemes which mislead their stockholders regarding the financial condition of the company. The ability of some highly-profitable corporations to escape paying tax -- and in some cases to receive a refundable tax credit despite paying no tax -- is a scandal in the minds of Americans who are occasionally reminded of it by the news media. A principled elimination of the corporate tax, accompanied by adequate taxation of the actual beneficiaries (the shareholders), will be economically sound and publicly defensible. The level of tax paid on capital gains and dividends can be raised to compensate for the loss of revenue from the corporate tax. Foreign holders of shares in American corporations can be treated in either of two ways: 1. Taxed using all of the methods now employed by the government to collect taxes from foreigners who obtain income from American sources; or 2. Ignored, thus creating a substantial incentive for the continued investment of foreign capital on which America has become so dependent. |