December 16, 2012

Corporate tax treatment should be equal

Some philosophies I hold dear, like the the need for a level playing field, market and institutional transparency, a suspicion of near-monopolies, and the need for a well-functioning and prudent government that can make our economy function better.

All agree taxes are necessary for a well-functioning economy. Lately, Washington is discussing the end to some sacred tax-deduction cows.

We’ve discussed the possible repeal of the mortgage-interest deduction, offered with good intentions but resulting in a more regressive tax code. Corporations also have their share of tax advantages, and Obama promises that these too may be reformed.

Economists almost universally agree the corporate income tax makes little sense. If the goal is to ensure a share of the fruits of production go to the public coffers, it is more effective to tax these fruits once they are distributed to the shareholders through higher dividends and capital-gains taxes.To tax at the corporate level causes companies to engage in tax-avoidance strategies instead of innovation and production. Or, they forum-shop for friendly countries like Canada with its 15 percent corporate tax rate. Worse, the corporate tax raises the price of our export goods above our global competitors.

The more troubling issue is then why some companies are taxed while competitors are not. Perhaps now we should create a more level playing field based on an overriding principle — first, do no harm to economic efficiency.

The U.S. has a history of tax exemptions for organizations that selflessly pursue the betterment of society. Such exemptions are not because they are not-for-profit or because they have volunteer boards of directors. Rather, they are offered for service in the greater public good.

Some financial corporations are afforded tax-exempt status, even though they compete with other corporations that are not afforded this benefit. Corporations like credit unions and mutual funds divert their profits to their depositor/owners through payments to their share accounts or through lower than market interest rates when their owners borrow. In essence, such institutions are treated as mutual-benefit societies in which Peter pays Paul who repays Peter, with little interference from the IRS or the regulatory authorities.

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