Should the NC legislature reduce ?business taxes? this year? The answer is clearly yes. But more specifically, these reductions, which should target all business taxes including the personal income tax, should be made with an eye toward ultimately abolishing the misnamed corporate income tax. This tax violates not only the basic principles of efficient tax policy, but more importantly it is dishonest and unfair. Anyone who values transparency in government should advocate the ultimate abolition of this tax.
Corporations and other types of businesses do not and cannot pay taxes. The reality is that all taxes, business or otherwise, must come out of some real human being?s pocket. ?Business taxes? are hidden taxes and the so-called corporate income tax, currently at 6.9 percent in N.C., is the most egregiously dishonest.
Corporations are legal and accounting constructs, and as such cannot pay taxes. All revenues received by a corporation accrue to the benefit of some real human beings. Therefore, all taxes that are paid out of this revenue must come from someone?s income. These people can be broken into three broad categories?the corporation?s employees, customers, and owners, i.e. shareholders. All corporate income taxes are paid by some combination of these three groups. Workers pay in the form of lower wages or fewer jobs; customers pay in the form of higher prices; and shareholders pay in the form of smaller dividends or capital gains. This last group?the capitalist class who is usually the rhetorical target of those who advocate high corporate taxes?are not only made up of the ?fat cat? corporate board members, but millions of small investors whose pensions and other retirement funds are tied to the fate of corporate earnings.
For unincorporated business?i.e. sole proprietorships, partnerships, etc.– the story is the same, except that the proprietors, partners, and other entrepreneurs who own the firms replace shareholders. Here the owners? pay directly through the personal income tax, most likely at the top marginal rate of 8.25%. But even in this case, the taxes raise the cost of doing business and contribute to higher prices and lower wages. In reality, when we talk about the ?business taxes? in North Carolina we are invoking a euphemism for taxes on workers, consumers, shareholders, and independent entrepreneurs at all income levels.
The economic analysis ties into this point. An economically efficient tax system, one that does not distort investment and consumption decisions, should tax all income once and only once. The corporate income tax introduces double and in some cases triple taxation into the system. A worker at Wal-Mart who is paying personal income tax is being taxed on a salary that has already been reduced by the corporate income tax. A shareholder in the company faces triple taxation. First, when any income is taxed, by definition the tax reduces the potential income stream, i.e., interest, dividends and capital gains, that that income can generate. This is the first level of taxation. Dividends and capital gains are reduced further by the corporate income tax, and when they are finally earned, they are taxed as part of the investor?s personal income.
Every layer of taxation on any form of income represents a tax penalty on the activity that generated it. Investors, entrepreneurs, and workers are the engines of economic growth and prosperity. Corporate and business taxes add layer upon layer of penalties on the very activities that we should be encouraging to flourish; investment, entrepreneurship, and work effort.