by Dr. Roy Cordato
Senior Economist, Emeritas
North Carolina’s corporate income tax currently stands at 3 percent, and it is scheduled to be reduced to 2.5 percent in January. This is after annual reductions in the rate, which started in 2013 when it stood at 6.9 percent, the highest in the Southeast at the time. At present, North Carolina has the lowest corporate income tax rate in the country among those states that have a corporate tax. There are six that do not. N.C.’s goal should be to become the seventh.
Among the tax increases included in governor Roy Cooper’s proposed budget for Fiscal Year 2019 is a repeal of the scheduled January reduction in the tax, keeping the rate at 3 percent. In his rhetoric supporting this change, Cooper perpetuates the deception that corporations actually pay taxes and that, in not allowing the corporate tax to continue its decline, average working-class taxpayers will go unscathed. In other words, taxing corporations is just another way to tax the rich.
In making these arguments Cooper, either unwittingly or knowingly, is taking advantage of the voters’ lack of understanding about taxation generally, namely that every dollar in tax must be paid by some real person. Legal entities, like corporations, cannot pay taxes. If Cooper doesn’t know this, then he is probably not fit to be talking about tax policy, and if he does, it suggests that he is demagoguing the issue.
What Cooper Should Know
A corporation is a legal and accounting entity. It can’t pay taxes; only people can. All revenues that flow to a corporation ultimately end up in the wallets and bank accounts of real people. Because of this, all taxes “paid” by a corporation must come out of some real persons’ wallet or bank account. The real people who pay the corporate income tax are shareholders, customers, and workers. And clearly, the vast majority of these people are not “the rich.”
Shareholders pay through reduced dividends and capital gains. For those who are investing outside the context of a tax-free individual retirement account (IRA) or 401(K) retirement plan, the corporate tax imposes a third layer of taxation on their investments. When their principle investment is taxed as regular income, it also reduces any investment returns that investment can generate. That is the first layer. The tax on dividends and capital gains is the second layer. The corporate tax, by reducing the revenues available for dividends and the overall value of the corporation, imposes a third layer of taxation on that income stream. The corporate tax imposes another layer of taxation and reduces overall well being for working families who invest in an IRA (either regular or Roth) or a 401(K), which exempt the principle or the returns to the investment from taxes. It should also be noted that the value of pension funds for state employees and other workers are also reduced.
Again, because the corporations must get the funds to pay the tax from some real person, wages will be lower than they otherwise would be. Employees of corporations pay the tax in the form of lower take-home pay. Because their wages are already reduced by the standard income tax, the corporate tax imposes a second layer of taxation on wages of corporate employees. (Also, it has the negative effect of reducing employment opportunities for workers in general since fewer workers will be higher overall.)
And finally, customers pay the tax in the form of higher prices. That payment comes as an additional layer of taxation, of course, to the sales tax paid in North Carolina of approximately 7 percent, depending on the county.
The bottom line is that those who argue for increasing corporate income tax, like Governor Cooper and most of the Democratic party, in the name making corporations pay their “fair share” of taxes, are really claiming that shareholders, workers, and consumers are all being undertaxed.
The corporate income tax is a hidden tax and, as confirmed in North Carolina, easy to demagogue. While a few of the of the individuals making up the groups mentioned above may understand conceptually that they are bearing the burden of the corporate tax, none knows (or even can know) what that burden is. As such, it is a dishonest tax that is antithetical to a transparent democratic process.
To make intelligent voting decisions, citizens need to be aware of how much their government is costing them. Unfortunately, those who are paying the corporate tax are being deceived. The tax allows politicians and ideologues, whose desire is simply to raise taxes to support favored programs or interest groups, to gain additional leverage in the process invoking a fiscal sleight-of-hand. It lets them make promises to constituents while misleading them into believing that someone else — “greedy” corporations — are paying the bill.
Allowing the corporate tax to fall to 2.5 percent, as current law prescribes, keeps the rate moving in the right direction but it wouldn’t make the tax any less dishonest, more transparent, or more consistent with the democratic process. As long as the corporate income tax is in place, North Carolina’s citizens will continue to be misled.