Fred McKinney (opinion): Time for liberals to understand the truth about corporations – CT Post

If political philosophy were a religion, the belief that corporations do not pay their fair share of federal taxes would be up near the top of commandments. Corporations, thou shalt pay more. So, I am going to commit liberal economic heresy by making the case that liberals need to turn this belief on its head and take the position that corporations should pay no taxes.

I say this not because I am in the pocket of global corporations. I say this because the focus on corporate taxes distracts from the reality that corporations are not people and only people can or should pay taxes. We have gone down this fantasy that corporations are like other natural Americans with rights like the rights to due process, the rights to engage in political speech and soon, if the Republicans get their way perhaps even the right to vote. The Supreme Courts Citizens United decision has led to the total corruption of our political process by allowing corporations and their thinly veiled political action committees to buy the services of elected officials. This decision was largely based on the concept that corporations have rights.

If corporations doubled the amount of taxes they pay the federal government today, it would still represent less than 15 percent of total federal tax revenues. The fight to increase corporate taxes is a fools errand. We should change how we treat all corporations.

Many if not most small businesses form corporations that are also known as pass-throughs. These are S-corporations, LLCs and other forms where if the corporation earns a profit, those profits are allocated to the owners of the corporation who report those earnings on their personal income tax returns. We already have the structure to accomplish what I am suggesting. In effect, all corporations should be pass-throughs like S-corporations.

The shareholders of public companies only get their share of the profits when the boards of those corporations decide to distribute some, usually not all, of those profits in the form of dividends. What if this decision was taken out of the hands of the corporate bosses and all profits had to be distributed to the owners of the corporation? This would fundamentally change corporate financial behavior. Corporations might more likely be interested in expanding their operations by borrowing money than sharing profits with shareholders. Economists refer to this conflict of interests within corporate behavior as agency problems. And think of all of the brain power that is currently being used to avoid corporate income taxes could be repurposed into something that actually benefits society.

I dont think we as average tax-paying Americans should lose any sleep about how corporations might adjust to a reality that they have to distribute all their profits to shareholders. They have some of the best legal and accounting minds money can buy. Our concern should be on collecting the amount of money the federal government needs to do its job for the American people from the American people.

Shareholders would be paid their share of the corporations profits. Many shareholders would need those profits to pay taxes on their share of corporate profits. This would put pressure on corporate leaders to be better stewards of corporate resources. And it would force investors to stop treating their investments as tax-avoidance strategies.

Eliminating the corporate income tax would also eliminate a complaint of double taxation made by those on the right for years. Corporate profits are taxed and when dividends are paid out, the recipients then pay taxes on those dividends. Eliminating the first tax eliminates the double taxation.

Eliminating the corporate tax rate should only be done if it is combined with further simplification of the tax system. First and foremost, income is income. A second harmful delusion we suffer from is that income earned by those who own stock is different from income earned by workers, or income from people and companies who own commercial real estate. Income is income and there need be only one tax rate on all income in a given bracket.

This is not to say there should not be progressiveness in tax rates. If you are in the highest income bracket, your taxes should be determined by your total income regardless of whether it comes from rents, labor, capital, of financial shenanigans like carried interest, or distinctions between long-term and short-term capital gains. If we tax income progressively there will tremendous gains in the efficiency of the economy.

Eliminating corporate income taxes and simplifying our tax system is an important step to eliminating corporate abuse, malfeasance, corruption of our political processes, and the unproductive war between real Americans and fictitious pseudo-persons like corporations. I think we should call the right wings bluff on corporate income taxes and eliminate the corporate income tax. I suspect they would not be in favor of what I am suggesting.

Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm that conducts public and private research since 1999, and is the emeritus director of the Peoples Center for Innovation and Entrepreneurship at Quinnipiac University.

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Fred McKinney (opinion): Time for liberals to understand the truth about corporations - CT Post