October 02, 2014
Eduardo Porter has a good piece discussing the increasing problem of the evasion of corporate income taxes. At one point he notes that some people have called for eliminating the corporate income tax altogether and making up the lost revenue with higher taxes on the wealthy.
Porter dismisses this idea by saying that it would be politically difficult to raise taxes on wealthy individuals by enough to make up the lost revenue. He then adds:
“Mr. Saint-Amans [the head of the OECD’s Center for Tax Policy and Administration] said he feared that without the corporate income tax, income taxation would fall apart entirely as the wealthy could avoid taxation by becoming companies, inserting several corporate layers between themselves and their money.”
This problem should be reasonably manageable. If there was some minimal annual fee that companies paid for tax exempt status (I had previously suggested $1 million but $250k might be sufficient), very few people would find it profitable to engage in such tax gaming. This should make it relatively easy for the I.R.S. to investigate the companies that file for this status and ensure that they are real companies and not just tax scams. The problem would not be qualitatively different than what the I.R.S. faces now with 501(c) tax exempt organizations.
This would also likely have minimal impact on real businesses. The small businesses that might not find this worthwhile likely would not be owned by people in top tax brackets anyhow, or alternatively have few profits to show in their first years. Many of these businesses are not now incorporated, so little would change in their situation. The point is that a real business of any size would have no problem paying this fee without impairing its operations.
The issue about the politics of raising individual tax rates is real, but it should be possible to design a system that would minimize the opportunities for gaming of the sort described here.
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