Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
The Corporate IncomeTax Is the Worst Tax Ever Invented
The corporate income tax is the worst tax ever invented. Economists who have studied and written about its incidence, that is who actually pays the tax, agree that it varies from industry to industry. Monopolists pass the tax on to consumers so that although they appear to be paying the tax they do not bear the burden of the tax. It even varies among monopolists depending upon how much competition they have from competing products. It even varies among firms in highly competitive industries like supermarkets. Some have some monopoly power depending on their location and the number of supermarkets in their vicinity. The corporate income tax violates every principle of taxation. Not only does much of it fall on consumers, but the tax penalizes workers who depend on pensions and IRAs, etc. for their retirement. The income from the wages invested in their retirement schemes is taxed at the maximum rate of corporate tax, currently 35% so their pensions and retirement income is much less than it would be if the tax were 15 or 20% as would be if it is were taxed under the personal income tax. The rich shareholders pay no personal income tax on their corporate income except dividends, and they escape the highest rates by buying back shares rather than pay dividends, a practice that is increasing.
So why don’t we tax corporation as partnerships are taxed. Partners pay personal income taxes on their shares of the partnership’s income. The reason given historically is that corporations have the privilege of limited liability for their shareholders. If the corporation fails, shareholders have no additional liability to what they have already invested in the corporation. But even this argument no longer holds. In most States, perhaps all, partnerships and proprietor ships may elect to be treated as limited liability companies. Increasingly one see the letters LL.C. indicating that only the assets of the company are liable for its debts.
So what is the excuse for a separate corporate income tax with all its inequities and bad economic practices that the corporate income tax encourages. No excuse at all As for the abuses, we’ve written about them in articles on this blog in the past.
An essential companion reform is changing the rules for depreciation under the corporate and the personal income tax as well. Both taxes permit accelerated depreciation which is fine except that the same property investment gets deducted over and over again because when property is sold, the buyer is able to depreciate what he paid for the property. Buyer of hotels, office buildings, and apartment buildings pay little or no taxes in the first decade or two of ownership because of accelerated depreciation. Then they sell the depreciated property converting the accelerated depreciation into a capital gain. Then the buyer starts the process over again depreciating the amount he paid for the property. That is probably the reason Trump did not release his income tax return. It would have showed that he paid very little income tax as a result of accelerated depreciation allowances, perfectly legal of course. The remedy is simple. Any buyer of businesses, hotels, and buildings should be obliged to take the remaining basis for depreciation the seller’s remaining basis for depreciation.
In addition, corporations, including real estate corporations, are the principal source of the very unequal distribution of wealth in the U.S. Whenever a corporation lists its securities on a stock exchange, the seller realizes an enormous unrealized capital gain on the stock he owns for which he paid very little. The recent instance of Zuckerberg and Facebook is an example. Overnight Zuckerberg became a billionaire when Facebook made its initial public offering. Nothing wrong or illegal about that but it is an example of how billionaires are made from appreciation in the value of corporate shares and real estate.
As Trump knows from his own experience, tax reform is essential to make the U.S. great again. He should begin by eliminating the corporate income tax as a separate tax and taxing corporate income the same as partnership income is treated under the personal income tax. And income tax can be made more equitable by requiring buyers to assume the sellers’ basis for depreciation.
Real Estate Taxation
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