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Friday, July 7, 2017

Effectively Taxing corporations

Thomas G Shearman Advice on Taxing Corporations

Until fairly recently most Federal Revenues came from Corporate taxes rather than Income Taxes. The clever grifters, operatives and pirates of the 1970s, noted that corporate taxes were levied once, and then recipients had to pay a second tax on their dividends and used that argument to claim that people were being "taxed twice." Since on the face of it that seemed true, congress in it's immense wisdom, greased by lobbyist money, started cutting the corporate tax. But there is another way to look at corporate taxes, and also another way to levy them, and that is what this post is about.

Corporate Income Taxes

The corporate income tax is levied on Corporate profits, with corporations filing as entities. Since many corporations never pay dividends but reinvest their money, it was thought that the way to get at unearned gains from corporate privilege was with a "Corporate Income Tax" which treats a corporation as a Person for the sake of levying taxes. Tax payers would pay a separate tax based on their total income. Shearman believed that a Corporate profit tax should be:

"Now, one of the principle methods by which an income tax must be collected, if it is to be made at all successful, is by taxing dividends, coupons, and similar forms of income from corporations, THE TAX TO BE PAID BY SUCH CORPORATIONS AND DEDUCTED BY THEM FROM THEIR PAYMENTS TO THE INDIVIDUALS LIABLE THERETO. This is one of the most important sources of such income in any country."

Efficacy

Of course such a tax would necessitate accounting and accountants, and require the government to do audits, but:

"Corporations, as a general rule, and especially large corporations having many stockholders, are managed by officers whose personal interest in keeping down returns of income for purposes of taxation is too small to tempt them very strongly into frauds upon the Government. It is impossible for them to conduct their business successfully without keeping full and correct accounts."

Withholding

Of course no tax system is completely free of people trying to evade it, but letting corporations with-hold a corporate profit tax would incentivize them to reinvest the amounts withheld:

"from dividends and coupons, long before the tax itself is payable to the government; and thus they gain the use of a large sum of money for several months, without interest."

Such Taxes are Practical

And by exempting money reinvested in actual capital, and wages, in the USA, corporations can be incentivized to keep the money in the United States. More importantly, Shearman Rightly believed that:

"ALL INCOME DERIVED FROM CORPORATE STOCK OR BONDS, OR FROM THE RENT OF LAND AND HOUSES, can be fully ascertained and fairly taxed."

Taxing Privilege

He also believed that income from:

"EXCLUSIVE PRIVILEGES of any kind whatever. In other words, we should TAX ALL THE INCOME WHICH IS DERIVED FROM MONOPOLIES, WHETHER NATURAL OR ARTIFICIAL."

Should be taxed. Privileges like financial power, monopoly power, utility ownership, etc... all should be taxed. And Utilities should be regulated.

These taxes should be with-held by corporations and charged against the owners. Then there is no double taxation. Even if the company never actually pays the stockholders, since this is money earmarked for them.

Note about Estate Taxes (not from Shearman)

When someone dies, the tax on the person's estate is a transfer tax, it too should be taxed as income. There is no double taxation there, the person who died paid his taxes and this is unearned income to the inheritor.

Graduated Tax

Now Shearman argued against a graduated Tax. But he also would not have had problems with such taxes being on net income excluding sums reinvested in productive goods and services. And we shouldn't either. These are things that should be taxed.

Shearman argued for flat rates. I personally don't agree, but I mention that for the sake of fairness to his exposition. He was writing in 1893, right near the beginning of the Gilded Age, when many of the ultra rich were still folks who'd earned their wealth.

He also called these taxes "direct taxes", which is not technically true according to my friend Rick DiMare.

Further Reading and Sources

All Quotes come from Shearman's Congressional testimony:
Doc #129: A Just and Practicable Income Tax (1893), Thomas G. Shearman before the Ways & Means Subcommittee on Internal Revenue
https://www.facebook.com/notes/common-wealth-tax/doc-129-a-just-and-practicable-income-tax-1893-thomas-g-shearman-before-the-ways/889328957846915//dd>
For those who don't have access to my friend's Facebook account:
http://www.amazon.com/Thomas-Shearman-Subcommittee-Internal-Revenue/dp/1240045913/ref=sr_1_1?ie=UTF8&qid=1453377486&sr=8-1&keywords=%22hon.+thomas+g.+shearman%22

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