I was reading Greg Mankiw’s excellent blog today, and came across a bit of discussion about corporate tax rates. Now I’m pretty liberal (and Dr. Mankiw isn’t by any measure: he was the chief of the CEA under G.W. Bush), and I believe in progressive taxation, and the rich, who generally reap more benefit from large infrastructure investments and a healthy workforce for their factories, should pay more than the poor, who have to use government benefits. But one thing, after thinking about we can agree on is corporate taxes.
They need to go.
Now you may think I am crazy – but here’s why. Your 401(k) is probably pretty darn full of stocks right? Mine is: about 95%+ stocks, given my young age. Corporations that are profitable pay a pretty high tax rate (albeit full of loopholes) – actually one of the highest in the world, the top marginal rate is 39%, albeit it isn’t fully progressive & there are loopholes big enough you could drive a couple dozers through side-by-side. If you lose money, you pay nothing (with some exceptions – some items can not be deducted from taxes (like fines), so in theory you can lose money in the eyes of your shareholders in a given year but pay taxes, and there are differences from how the IRS does things and the SEC wants them done – again these are not common enough to make a significant impact). More or less, we tax those who profit. By allowing firms to retain more of their earnings, we increase value in retirement plans, personal investing, and give firms extra money to spend on projects and employees (albeit I could argue that the market will demand all of this back).
My one big problem with this is how we treat dividends as special, and tax them (at least long term) at lower rates than short term earnings. We should do away with this, and treat all income the same on a personal level. Firms can be expected to pay higher dividends by their shareholders to make up for this change in tax policy (10-15% higher, given the current cap of 25% and top marginal tax rate of 36%, scheduled to return to 38.9% in a few years), however if P/E remains constant, the value created here will overtop any personal taxation policy changes, as enough stock holdings are tax advantaged to not cause a direct 1:1 correlation.