A Better Way To Reshore American Manufacturing: Abolish the Corporate Income Tax

President Trump wants to increase the country’s domestic manufacturing base and is using the threat of increased tariffs to force companies to build factories here instead of abroad.Yet there is a much better way to induce an American manufacturing boom: abolish the corporate income tax. And the other economic effects of doing so would be both numerous and overwhelmingly positive as well.The corporate income tax was only meant to be a temporary solution to a political problem and its continuation did vast harm to the country.In the late 19th century, the federal government was largely funded by consumption taxes such as the tariff and excise taxes on liquor and tobacco. But consumption taxes are inescapably regressive as the poor consume much more of their incomes than do the rich.This caused growing political pressure to tax the incomes of the wealthy in order to, well, “make the rich pay their fair share.” Yet the Supreme Court had ruled a personal income tax unconstitutional as a “direct tax.” So in 1909, President Taft proposed that Congress pass a constitutional amendment allowing an income tax and, while waiting for ratification by the states, to tax the profits of corporations.Since at that time almost all corporate stock was owned by the richest segment of the population, taxing corporate profits was, indirectly, taxing the incomes of the rich.But instead of substituting a personal income tax, the strongly Democratic Congress elected in 1912 kept the corporate tax and added a personal one to it when the amendment was ratified the following year.Two separate, uncoordinated, income tax codes have proven to be a veritable engine of tax complexity as tax lawyers and accountants have played the two systems off against each other. When the personal income tax soared to 75 percent to help pay for World War I while the corporate rate stayed much lower, many of the rich incorporated their holdings so they only had to pay personal income taxes on the money they took out of the corporation.Yacht owners incorporated their yachts, thus making their expenses deductible, and then they “rented” them when they wanted to use them.Yet the biggest problem with the corporate income tax is that corporations don’t actually pay taxes, they just cut the check.Instead, the corporate income tax is paid by some combination of the stockholders with lower profits (and thus lower stock prices), employees with lower wages, and customers with higher prices. The exact mix depends on the particular competitive situation of each corporation, but the Acton Institute estimates that, on average, employees pay about 58 percent of the corporate income tax.Abolishing the corporate income tax would, to be sure, be a temporary hit on federal revenues. They amounted in 2023 to 9.5 percent of total revenues. But eliminating the tax would also greatly increase other revenue, with advantageous side effects. Corporate management, say, is now most concerned with after-tax profits, as that is what the stock market cares about. But after-tax profit is often a measure of lobbying success in Washington. With no corporate tax, they would concentrate on what is now pre-tax profit, which is solely a measure of wealth creation.In the absence of a corporate income tax, thousands of lobbyists would have to go find wealth-creating jobs instead of the wealth-transferring ones they have now.Without the corporate income tax, too, there would be no reason for reduced rates on dividends and capital gains in the personal income tax, a perennial bugaboo of the left.Corporate reported profits would increase sharply, leading to higher pay for employees and higher investment in plant and equipment.Without the corporate income tax, higher profits would lead to substantially higher share prices, inducing a “wealth effect” that would lead to increased GDP. Unlike a century ago, some 70 percent of corporate stock is now held not by the rich but, directly or indirectly, by the middle class, in 401K and IRA accounts, pension funds, and by insurance companies to fund annuities. So the wealth effect would be widespread.The biggest reason to abolish the corporate income tax, though, is that with the lowest corporate income tax in the world, which is to say zero percent, foreign companies would flock to build plants in the United States. Why? Well, this country is the only one that taxes the foreign earnings of individual citizens and corporations and so those foreign companies could bring their increased American profits back home tax-free. Why, indeed, would Tata Motors, for instance, which owns Range Rover, manufacture them in Britain, which has a 25 percent tax on corporate profits, when they could manufacture them in America and pay no tax at all?

A Better Way To Reshore American Manufacturing: Abolish the Corporate Income Tax

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