Aside from concerted action to strengthen the dollar — a step that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson seem utterly uninterested in — policymakers have one other major option available to them that could rapidly bolster the American economy while also doing long-term good rather than harm.
Eliminate the federal corporate income tax.
Yes, kill it entirely.
The problem with the economy right now is not a lack of liquidity — the whole world is awash in dollars — but a lack, instead, of anything good to do with those dollars rather than hoard them. The problem, in short, is that nobody has any incentive to invest those dollars, or to lend them for investment, here in the United States.
Eliminate the corporate income tax and, immediately, every American corporation becomes more profitable by as much as a third. All the pensioners who own stock in those companies get richer — immediately. All the workers with company stock-share plans get richer. Prices will drop as companies can make more money, net, even with lower prices. Companies also would save billions of dollars spent in tax-form preparation, and in time spent figuring out tax-avoidance schemes. The economy will get more efficient when tax considerations no longer distort decision-making.
Real interest rates will drop due to market forces (rather than through panicky fiats from the Federal Reserve Board). And, wonder of wonders, companies that have been moving operations overseas will now reverse course and race back within our shores — bringing hundreds of thousands of jobs with them. All of those complaints about “outsourcing” will end, virtually overnight.
That’s why this is one “pro-corporate” reform that also is overwhelmingly pro-labor. The Congressional Budget Office has noted that “domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.”
Meanwhile, the cost to the Treasury would be exceedingly slight, if any at all. Figure it this way: First, well over half the IRS is involved with collecting corporate taxes. With that function eliminated, the government could save more than $5 billion a year on appropriations for the IRS. Second, the lower interest rates will also lower the government’s annual interest payments on its debt. Third, the stronger economy will generate additional tax revenue — not just indirectly, through overall economic growth, but in very specific ways. How? Because if there are no corporate income taxes and thus net profits are one-third higher, then the capital gains tax collections and dividend tax collections from every shareholder or trader will grow as well, even if the economy as a whole remains static. Think about that again: Even if there is no overall economic growth, the tax revenues from capital gains and dividends will grow — and if there is growth in the overall economy, then tax revenues from all other sources will increase, too.
And that’s just a quick synopsis of the biggest, but far from the only, economic benefits of eliminating the corporate income tax. And, whereas Congress might bicker and delay and waste time in dealing with the myriad complications from merely altering the corporate income tax system, it could act extremely quickly, if it so desired, if it wants to pass a simple, straightforward bill to eliminate the corporate income tax entirely.
If it does so, investors will rush back into our economy in huge waves, incredibly quickly, and the current crisis could be solved in a flash. The dollar will be strengthened, the stock market will boom, and borrowers and lenders both will soon feel reassured enough to start consummating home loans again.
Finally, corporate income tax elimination would have a huge added benefit in the realm not of economics but of ethics. It would do so by eliminating the motive and opportunity for half the lobbying — and thus half of the unethical lobbying, with it — that goes on in Washington. Most lobbying involves one of two things: spending and taxes. And most tax-related lobbyists are paid by corporate interests looking for special breaks in the corporate income tax code. Take away the taxes, and you take away the need for the tax breaks — and thus for the lobbyists.
This is decidedly not to say that the lobbying itself is usually corrupt. It’s not. But where money and interests and votes intersect, the whole system of incentives is naturally changed even without overt corruption. Without needing to bother about which interest is hurt or harmed by each change in the corporate tax code, lawmakers can focus on the greater good — and on other, probably more momentous, issues as well.
Indeed, it is all the mucking around in the weeds of the tax code and in the pig trough of spending earmarks that leads otherwise well-meaning congressmen to become favor-dispensers rather than statesmen. Without a corporate income tax to fool with constantly, a huge chunk of the grounds for favor-dispensation will be taken away.
Good ethics and good economics, therefore, both commend this proposal to eliminate corporate income taxes. The current economic crisis gives it urgency. And even for the dimmest politician, understanding the advantages of the plan shouldn’t be too taxing.
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