A Public Choice look at the corporate income tax
Megan McArdle gets to an immensely important issue to modern business in an article in the Atlantic called “Why I Still Think We Should Eliminate the Corporate Income Tax.” In pertinent part:
If we really hate corporate power, we’d probably want to look at the things that entrench it–like heavy regulatory burdens that are more easily borne by large, powerful companies. But this is not an argument that ever gets much traction outside of some economists, and the libertarian community. Which makes me think that the corporate income tax is largely expressive–we like policies which penalize corporations, particularly big ones, regardless of their actual effect on corporate power.
Although stopping short of claiming that the corporate tax is a driver of corporate power over that of individuals, McArdle (who admits the latter is plausible) makes an important point. If we desire a level playing field for everyone, big and small, then how is having a hundred-thousand page tax code conducive to getting the little guys on the same footing with the GEs, GMs, and Berkshire Hathaways of the world?
When giant corporations are the only ones who can afford armies of lawyers and accountants to get their tax bills to zero, what hope have the little guys for a level playing field? Make no mistake, this is a governmental problem. Every company and individual does their best to minimize their tax bill. But when the expense involved in bringing it down exceeds the capital of the business, you’ve clearly gone past the point of diminishing returns.
And these massive expenses can only be borne by those with enough resources to hire every white shoe on Wall Street and give enough money to Obama to land a place on his speed dial. You want less corporate power? So do I, but it starts in Washington. You want fewer mosquitoes, drain the swamp.
This logic extends very well into other areas of law, including – most egregiously – Sarbanes Oxley and Dodd-Frank. These types of laws introduce a classic Catch-22 to the common small businessman. If you want funding, you need to be able to afford to jump through government hoops. Of course, you’ll never be able to afford to jump through government hoops if you don’t have funding.
This is doubtless a major reason why IPO activity has been fleeing America’s shores for more fertile ground in places like Hong Kong. While there are certainly many factors at play, it bears pointing out that high IPO activity is, to a huge degree, generated by stable institutions and good governance. That being the case, it is easy to conclude that, despite their stated goals, things like the corporate tax, Sarbanes-Oxley, and Dodd-Frank actually have opposite results.