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A Proposal for a New Federal Tax Code Abolishing the Corporate Income Tax
Raymond Richman, 7/3/2013

Recently, in this space 5/23/13, we pointed out the urgent need for tax reform and proposed limiting the IRS to an income tax on wages and salaries. We proposed abolition of the corporate income tax and replacing it with a tax on the market value of corporations. Since then we have reconsidered our proposal and we want to share with you our thoughts about what tax reform is needed and the present status of the reform we are proposing.       

 The history of the modern income tax is often traced to Pitt’s British income tax of 1798 which fell short of achieving its targeted revenue, the shortage being made up by voluntary contributions. But the succeeding Income and Property Tax Act of 1803 was a success. It was simply a reenactment of Britain’s Income and Property Taxes that date back to William of Orange at the end of the 17th century and even earlier to the taxes under the Tudors. What they all had in common was that they had different treatments of income from different sources. We’re suggesting something similar, taxing income from wages, salaries, and bonuses more or less as they are currently taxed but taxing corporations by a tax on the market value of shares of the corporation. They would be two schedules of a single tax. Briefly, what we are proposing is to abolish the corporate income tax and taxes on dividends and capital gains and replace them with a tax based on the market value of the corporation’s outstanding shares and in another schedule we would tax wages and salaries, interest income, and the income of unincorporated businesses, including partnerships not listed on the stock exchanges and proprietorships. The taxation of real estate would be in a third schedule and the revenue reserved to the states in which such real estate is located.

 As economists and business majors know, the market value of the outstanding shares of a corporation is the capitalized value of the expected future earnings of the corporation. The value of any asset is the value of the enjoyment, including earnings, expected from its ownership in the future. Taxing the value of an asset is equivalent to taxing the income from it. Instead of taxing corporate income with all of its huge costs of administering, complying, and enforcement, we replace it with a tax on the capital value of that income with all of its simplicity of calculation, with incredibly low costs of administration, compliance, and enforcement.

It has all the advantages of the progressive income tax and none of its disadvantages. It is more progressive than the income tax because wealth is highly concentrated. Warren Buffett reported that his personal income tax rate was lower than his secretary’s in 2011. Were he and his secretary taxed on the value of the corporate assets srate relative to their incomes than she.  An example will show this:

Suppose an individual owns $20 billion worth of corporate shares and received dividends and realized capital gains of $2 billion, subjecting him to a tax at 2011 rates of 15% on dividends and capital gains, or $300 million. Under a 3% tax on corporate value, he would have paid $600 million, or 30 percent on his income.        

Other advantages would include the end of double taxation of corporate earnings paid out as dividends, an end to practices intended to convert ordinary income to lower taxed capital gains, such as corporate buy-backs, payments to corporate executives in the form of options, etc., the incentive to outsourcing production with its negative effects on employment.

The personal income tax on wages and salaries and interest income would be retained.  Partnerships and proprietorships could elect to be treated as corporations or have their incomes taxed under the personal income tax as they are at present.   

The advantages of the new tax system include the following:  

  1. a huge reduction in the cost of administering, complying, and enforcing the personal and corporate income taxes, a saving the taxpayers of hundreds of billions of dollars,
  2. ending the myriad “schemes” for avoiding income taxes, particularly the actions taken by corporations to convert ordinary income into capital gains and failing to repatriate income earned abroad,
  3. eliminating the tax incentives to outsource production abroad since income earned abroad will be reflected in the market value of the corporation’s shares,
  4. eliminating the incentive not to repatriate income earned abroad since income earned abroad will be reflected in the value of the company’s outstanding shares,
  5. an end to double taxation of corporate income since dividends will have already been taxed by the tax on capital value of the corporations which reflects the earnings per share. Double taxation of corporate income did not exist under the British Income and Property tax which gave a credit to individuals at the basic rate of tax of taxes paid by corporations.
  6. increasing the progressivity of the tax system because the ownership of corporations is highly concentrated in the hands of the very rich.

The corporate income tax has been correctly described as hostile to investment and a barrier to exports because it makes it difficult for corporations to compete internationally. American corporations have long been outsourcing their production of manufactured goods. Millions of jobs have been lost as a result of the trade deficits and a million additional jobs have been lost as a result of outsourcing. The income they earn abroad is not taxed until it is repatriated and is taxed at lower rates in the country where it manufactures its products, outsourcing continues and American workers are losing  jobs. It was brought to light recently in a Senate hearing that Apple Corporation avoided billions in U.S. income tax in recent years by not repatriating the income its foreign subsidiaries earned abroad. A tax on corporation wealth would tax the capitalized value of income wherever the income is earned. Under current law, corporate income earned abroad is not subject to US income tax until it is repatriated.

    (to be continued. We welcome the input of our readers.)

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Comment by Eugene Patrick Devany, 7/6/2013:

 

In the U.S., businesses income can be taxed as C corporations or as pass-through businesses on the individual returns of their owners. The tax reform suggestion above seems to call for taxing the net wealth of C corporations (i.e. total value of stock) while continuing to tax the millions of pass-through businesses on their profits or permitting them to avoid tax on profits by electing to be taxed on net wealth. The value of real estate would also be taxed although it is no clear if the mortgage would be deducted to compute a net wealth value. The capital gains tax would also be eliminated, at least for some assets. A somewhat similar tax reform is called the 2-4-8 Tax Blend.
Legal tax avoidance is the duty of every investor and the proposal would encourage investment in assets other than corporate stock and U.S. real estate (i.e. gold, bonds, art, etc.) in order to avoid the wealth tax. A better approach might be to simply tax all individual net wealth so there is no incentive or distortion of one type of asset over another. A 2% net wealth tax (excluding $15,000 cash and $500,000 in retirement funds) would generate at least 40% of federal government revenue and enable the elimination of the job killing payroll taxes and a reduction of the individual income tax rate to a flat 8% for all (because tax expenditures are not needed with very low tax rates).
In regard to business tax reform there is a reason why every developed country in the world has considered and adopted a value added tax (VAT). A VAT is the fairest way to apportion taxes among different types of businesses and across different taxing jurisdictions because each business gets a credit for VAT taxes paid by other businesses in the chain of production. A revenue neutral 4% VAT would enable the C corporation income tax rate to be lowered to 8% and would not raise consumer prices. While most business tax revenue would be generated by the VAT a low income tax applicable to all business would ensure that the more profitable companies pay a slightly larger share. 
In the U.S., businesses income can be taxed as C corporations or as pass-through businesses on the individual returns of their owners. The tax reform suggestion above seems to call for taxing the net wealth of C corporations (i.e. total value of stock) while continuing to tax the millions of pass-through businesses on their profits or permitting them to avoid tax on profits by electing to be taxed on net wealth. The value of real estate would also be taxed although it is no clear if the mortgage would be deducted to compute a net wealth value. The capital gains tax would also be eliminated, at least for some assets. A somewhat similar tax reform is called the 2-4-8 Tax Blend.
Legal tax avoidance is the duty of every investor and the proposal would encourage investment in assets other than corporate stock and U.S. real estate (i.e. gold, bonds, art, etc.) in order to avoid the wealth tax. A better approach might be to simply tax all individual net wealth so there is no incentive or distortion of one type of asset over another. A 2% net wealth tax (excluding $15,000 cash and $500,000 in retirement funds) would generate at least 40% of federal government revenue and enable the elimination of the job killing payroll taxes and a reduction of the individual income tax rate to a flat 8% for all (because tax expenditures are not needed with very low tax rates).
In regard to business tax reform there is a reason why every developed country in the world has considered and adopted a value added tax (VAT). A VAT is the fairest way to apportion taxes among different types of businesses and across different taxing jurisdictions because each business gets a credit for VAT taxes paid by other businesses in the chain of production. A revenue neutral 4% VAT would enable the C corporation income tax rate to be lowered to 8% and would not raise consumer prices. While most business tax revenue would be generated by the VAT a low income tax applicable to all business would ensure that the more profitable companies pay a slightly larger share. 

 




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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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