Death to the Corporate Tax! - Brief Article - Statistical Data Included

Chief Executive, The, May, 2001 by Deroy Murdock

While the White House, Congress, and the fed debate how to revive the American economy, one remedy remains off the table. Eliminating the federal corporate tax would enhance domestic output dramatically and shift U.S. industry onto a much higher growth trajectory.

The corporate tax currently costs companies 35 percent of their profits. In fiscal 2000, it generated $207.3 billion in federal revenues.

A key argument against this levy is its role in the double taxation of earnings. Net income first gets hit by the corporate tax, then is taxed again when shareholders receive dividends. Washington should get no more than one swipe at any given dollar. Scrapping the corporate tariff and simply taxing individual dividend income would allow Uncle Sam just one chance to pat each investor down.

Of course this raises a crucial question: Who actually pays this levy? Class warriors humor themselves with images of fat cats on mahogany row digging into their deep pockets to cover this outlay (Dash it, Lockwood! No new yacht this quarter).

"We maintain the fiction that corporations pay taxes," Treasury Secretary Paul O'Neill told the Senate Finance Committee on January 17. "Corporations collect taxes; they do not pay them."

In fact, those who pay the corporate tax are not corporations, but people--and not just CEOs. As the Congressional Budget Office observed in a 1996 report: "A corporation may write its check to the Internal Revenue Service for payment of the corporate income tax, but that money must come from somewhere: from reduced returns to investors in the company, lower wages to its workers, or higher prices that consumers pay for the products the company produces."

Absent the corporate tax, dozens of companies might have made investments in recent years that would have helped them weather today's economic tempest. Put another way, if Washington reversed the more than $200 billion cash flow from corporate America to the Treasury, U.S. companies would be healthier today, and the Dow and NASDAQ averages would reflect this brighter outlook through higher share prices.

Insofar as roughly 50 percent of all U.S. households now own stocks--directly or through mutual funds--the corporate tax impoverishes every other American home.

Beside this tax's financial cost, compliance also consumes corporate resources. "The amount of time that you have to put into filling out these forms is another deadweight on the economy," says Americans for Tax Reform President Grover Norquist.

"Twelve full-time people at Pfizer do nothing else but fill out the federal tax return. It's a year-round proposition," says Bob Huber, director of media relations at the New York Citybased pharmaceutical firm. "Our last return was about three feet tall. This was probably fairly small for a multinational of our size.

The Washington, D.C.-based Tax Foundation studied the compliance burden that the corporate tax inflicts on U.S. companies. It examined IRS schedules 1120FSC, 1120RIC, and 14 other key corporate tax documents. It found that, in 1999 alone, 18,809,864 separate forms were filed. The time devoted to record keeping, learning to complete these documents, preparing them, and submitting them to the IRS devoured 1,164,462,586 man-hours. This is the equivalent of 133,295 Americans working year-round simply to process this paperwork. Tax Foundation economist Scott Moody estimates that this compliance burden alone costs American corporations $40 billion annually.

Before joining the Bush Administration, Paul O'Neill chaired the Pittsburgh, PA-based aluminum manufacturer Alcoa. In that capacity, he expressed his frustrations with the corporate tax to the Council for Excellence in Government on May 10, 1999:

"Some of the best and brightest people in my whole corporation do tax work," O'Neill said. "The value added to our society is zero, absolutely zero. Why do we have this unbelievable mishmash of stuff with some of the brightest people in the world working on corporate and individual taxes? Because we don't have the courage to say this is really stupid. There's a better way that could free up $250 billion a year of resources to work on good things."

A much better way, indeed. O'Neill could do America plenty of good by urging his boss to toss the corporate tax in the recycling bin.

New York commentator Deroy Murdock is a senior fellow with the Atlas Economic Research Foundation and a Hoover Institution media fellow.