November 7, 2011

Click here to view and here to listen to Dr. Roy Cordato discussing this Spotlight report.

RALEIGH — North Carolina should scrap its “hidden, dishonest, deceptive” corporate income tax. That’s the conclusion of a new John Locke Foundation Spotlight report.

“State lawmakers have talked about reforming the corporate income tax and lowering its rate, but the tax’s corrupting features will remain as long as the tax remains,” said report author Dr. Roy Cordato, John Locke Foundation Vice President for Research and Resident Scholar. “This tax needs to be repealed, not reformed. It violates all basic principles of sound economic policy and open government.”

Cordato targets the corporate income tax on multiple fronts. It adds extra layers of taxation on people’s incomes, he said. It’s “riddled with special exemptions” that help government manipulate the economy. It deceives the people who foot the bill, and it plays into the hands of politicians who like to bash “greedy corporations.”

“Most discussion of North Carolina’s corporate income tax has focused on the rate, which is the highest in the Southeast at 6.9 percent,” Cordato said. “But the rate is just one piece of the story, and not really the most important piece.”

Collected since 1921, North Carolina’s corporate income tax rate has ranged from 3 percent to 7.75 percent. The state has assessed a 6.9 percent tax rate since 2000.

“Since its inception, politicians have seen the corporate income tax as one that can and should be manipulated,” Cordato said. “Theoretically, it’s levied equally on all for-profit corporations that qualify for the tax. In reality, a host of special exemptions help the government manipulate investment and business activity in the name of political goals such as economic development, energy efficiency, or environmental protection.”

Most major economic incentive schemes in North Carolina involve some sort of tax credit or other exemption from the corporate income tax, Cordato said. “These include everything from credits for building recycling facilities and installing solar plants to credits for using state ports.”

In other words, politicians generally tax corporations at high rates, then grant exemptions as a way to gain power over market outcomes, Cordato said.

“It’s best to view the corporate income tax as a type of ‘negative slush fund,'” he said. “Instead of doling out subsidies to favored business and political allies from already collected tax money, politicians allow their cronies to keep more of their own money than the tax would otherwise indicate. This is not a tool of taxation. It’s a lever used for central planning of the state’s economy.”

Cordato also tackles the myth that corporations pay taxes. “Not only do corporations not pay taxes, they cannot pay taxes,” he explained. “A corporation is a legal and accounting entity. Only people can pay taxes. This means all taxes ‘paid’ by a corporation must come out of a real person’s wallet or bank account.”

Shareholders, employees, and customers end up paying the tax, Cordato said. “Shareholders faced reduced dividends and capital gains, in addition to the fact that the corporate tax imposes a second or even third layer of taxation on their investments,” he said. “Corporate employees pay in the form of lower wages, and the corporate tax represents a second layer of taxation on wages already reduced by the standard income tax.”

“Customers pay in the form of higher prices,” Cordato added. “Once again, this is a second layer of taxation, since they’re already paying a sales tax of roughly 7 percent on their purchases.”

These facts counter the arguments of those who claim corporations fail to pay their “fair share” of taxes, Cordato said. “People who make that argument are really saying that shareholders, workers, and consumers are being undertaxed.”

The corporate income tax is hidden from the people who pay it, Cordato said. “Even those shareholders, workers, and consumers who realize they are paying corporate income taxes have no way of knowing what their tax burden is,” he explained. “The corporate tax adds a real but unquantifiable layer of taxation. As such, it is dishonest. It is antithetical to the functioning of a transparent democratic process.”

Politicians use the tax’s exemptions to perform a “fiscal sleight of hand,” Cordato said. “They can make promises to constituents while misleading them into believing that someone else — a greedy corporation — is paying the bill,” he said. “Very often, it’s progressives who support this tax despite its negative impact on workers and consumers.”

Political leaders deserve some credit for looking at a reduction in the corporate tax rate, Cordato said. “While I applaud the focus on fixing the problem, a lower corporate tax rate only ameliorates the tax’s injustices and distortions of the political and economic process,” he said. “A lower rate wouldn’t make the tax any less dishonest or more transparent. The solution is repeal.”

Dr. Roy Cordato’s Spotlight report, “The Corporate Income Tax: Repeal, Not Reform,” is available at the JLF website. For more information, please contact Cordato at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].