Taxes on corporate profits are one method to raise revenue to provide government services. Many on the Left feel that the federal government should increase corporate tax rates from current levels as a way to raise revenue, reduce deficits, and narrow the gap on income inequality. I believe that these policies are misguided and will inevitably lead to unintended consequences that would have the opposite effects of those noble aims.

Corporations do not ultimately bear the burden of taxation, it is instead borne by the beneficial owners of the corporation, the shareholders. These equity holders receive profits in the form of dividends, which in the short term, would be reduced by an increase in corporate taxes. In the longer term, however, prices that companies charge for their products would increase because shareholders need to earn a rate of return commensurate with the risks taken. Thus, an increase in the tax on corporate profits is regressive, with consumers paying for the tax increase in the form of higher prices on all goods and services, without regard to their individual income and financial well-being.

A better solution would be to reduce corporate taxes, to zero if possible, in order to eliminate all the expenses that corporations incur by avoiding and filing taxes with the federal government. Competitive markets would dictate that corporations would lower prices, providing disproportionate benefits to poorer individuals. The United States would also gain a distinct competitive advantage in the international market for the domiciling of corporations, and the increase job creation that would flow from those changes. The lost revenue could be made up through an increase in the individual tax rate, which is progressive in the respect that the more you earn, the higher proportion of your income is paid to the federal government, which would narrow income inequality in this country. 

Comment