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Volume 68, Issue 136, April 18, 2003

Opinion

Abolish corporate income tax

Thomas Asma
Guest Columnist

In a presentation to my investments class this semester, I lauded President Bushis proposed elimination of the double taxation on dividends as a welcome, if imperfect, tax reform. 

I proposed, however, that the more sound structural reform would involve the abolition of the corporate income tax accompanied with setting the dividend and capital gains tax rate at par, leaving no preference for either on the basis of tax distortion.

This would still eliminate the double-taxation aspect, significantly reduce the over-taxation of savings and investment in America, increase productivity and wages, lower the cost of capital, increase business competitiveness, make better stock prices and end the poisonous behavior corporate tax laws encourage.

I thought that an investments class would appreciate the better environment for investment and the economic growth that would follow. I expected some disagreement or concerns about the severity of the action, but not the gasps and raised eyebrows that came from my professor and peers, as if I had crossed the border into forbidden territory -- tax cuts for Enron, how evil. 

In the exchanges that ensued, characteristic of most conversations on the subject, I found that people have little knowledge of the tax system, from whence and where federal revenues come and go. Unknown is that the idea of the corporation as a conduit of income to the owner already had its precedent in the business forms of the partnership and sole proprietorship

But worse, even business students seem to cling to a general antipathy towards corporations. This of course was brought on by the corporate malfeasance scandals. The corporation is viewed as a cold, distant entity, as opposed to the warm and friendly federal government.

The inefficiency of government is lost on some minds, and the government and the private sector are viewed as equally capable in handling money. Few think about the moral hazard of taxation and the federal government.

Whatis more, people seem to feel that corporations should never be given tax breaks. They had done enough to hurt "us," and are prime for punishment. Corporations are seen only as the executives with multi-million dollar severance packages. 

Forgotten is that fact that a corporation is not just crooked executives. All corporations are not Enron. The corporation is common stock shareholders, debt holders, employees and consumers.

Punishing the corporation for alleged misdeeds through taxation is punishing all, not just CEOs who cook the books. Economists agree that most taxation costs is simply passed on down. For example, higher corporate taxes mean less money for employment, higher prices for consumers and lower profits. Payroll taxes on the business side result in lower wages. High unemployment benefits discourage hiring. The perverse trickle-down of taxation goes on.

Though misperceptions and ill feeling block sober debate over taxation, these teachable moments are heartening, since they show that dealing with opposition to a bold, true reform, such as elimination of corporate income tax, is a matter of educating people, not just unmovable political opinion. 

Once there is an atmosphere of peace in the United States and when Americans forget their ill feelings toward corporations, we can take a sober view towards the reform of corporate taxation with the complete realization of the great things that would follow.

Asma, a senior finance major, can be reached via dccampus@mail.uh.edu.
 

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