Defending Corporate Income Tax

• The article argues for a comprehensive rationale for defending the current corporate income tax.

Inadequate Justifications for Corporate Tax

• Typical reasons for the tax, like indirectly taxing shareholders or as a benefit tax, are insufficient.
• The original purpose for adopting the tax in 1909 aimed to regulate managerial power.
• This purpose stems from the "real" view of the corporation.

Normative Argument

• Regulation by taxing corporations as of 1909 remains valid under existing social conditions.
• The rise of multinational enterprises strengthens the argument.
• This rationale is necessary to combat corporate tax shelters and tax competition.

Corporations: Everywhere but Nowhere

• Corporations are widespread, with over 80% of U.S. economic activity occurring through them.
• Many institutions, such as universities and churches, take the corporate form.
• The idea of the state originated from corporate concepts.
• The “aggregate” view of corporations posits that corporations don't truly exist.
• They are seen simply as a connection point for relationships between stakeholders.

The Corporate Reality

• Approximately 1909, theories acknowledged corporations' "real" existence apart from shareholders and the state.
• Corporate management's power through the corporate form was recognized.
• The goal is to examine corporations, society, and the state via corporate income tax.
• The tax offers a unique lens to view the state's intervention and theories behind it.
• The debate between "real" and "aggregate" views ensues.

Evolution of Views

• In 1909, the “real” view was typical, the corporate tax was a means to control corporate management, but nowadays the prevailing view is aggregate.
• Tax seen mostly as a way of taxing shareholders.

Article Structure

• Part 1: Examines current justifications for corporate tax to address academic and practical doubts, plus because trends erode the tax base.
• Part 1's Conclusion: Current justifications are flawed as they are based on the aggregate model.
• Part 2: Reconstructs original reasons for 1909 enactment, based on a "real" theory to limit managerial power.
• Part 2's Note: Different from the 1894 tax, viewed mainly as a way of taxing shareholders.
• Part 3: Normative Argument: Corporate tax's original motivation has continuing force because the real view still matters as managerial power remains an issue.
• Part 3's Note: Rise of multinational enterprises requires reassessment, corporate tax can regulate the relationship.
• Part 4: Examines policy implications, arguing the corporate tax should be a defense against shelters and tax competition.
• Part 4's Suggestion: Integration isn't necessary to prevent double taxation.

Attacks on the Corporate Tax

• Calls within government and academia for an abolishion and radical reform.
• No significant normative defense in recent years for retaining corporate taxation.

Importance of a Normative Justification

• The corporate tax is complex, with significant societal transaction costs.
• Taxing only certain entities leads to welfare losses as business owners change preferred organisation to avoid it.
• These costs build a case for a repeal of tax.

Eroding Corporate Tax Base

• Corporate income tax revenues are declining
• Corporate tax shelter industry, that help reduce corporate tax, exist.
• Worldwide decline in corporate revenues stems from tax competition.
• Inversion transactions, shifting headquarters to tax havens, lower tax rates.

Responses to Erosion

• Domestic efforts: Congress and IRS work to combat corporate tax shelters.
• International efforts: Organizations like OECD and EU aim to restrict harmful tax competition.
• Convincing reasons on why corporate tax helps those efforts and are hampered by a lack of explanation.

Existing Justifications for Corporate Tax

• Defenses can be split into three:
• Aggregate view, real entity view, and artificial entity view

Aggregate Defenses

• A defense, based on the aggregate theory of the corporation, is the corporate tax seen as an indirect way of taxing the shareholders.
• The idea is if there was no corporate income tax shareholders could protect their income by earning it through corporations.
• This resulted in deferred tax until dividends were paid.
• May cause tax loss is the shareholder holds the shares until death.
• Collecting from corporations is easier because it is fewer than shareholders and they can be hard to reach.
• From this perspective the corporate tax is a withholding tax at corporate source of their income.

Alternative Methods of Taxation

• Shareholders granted a credit for taxes paid by the corporation.
• Rare third alternative that meets aggregate view; permit a corporation to deduct dividends.
• No corporate tax will exist to to the extent profits are distributed and taxed in the hands of the shareholders.

Taxing Shareholders on Corporate Income Possible?

• Corporations can be divided into two categories,
• closely held
• publicly traded
• Taxation of income from closely-held corporations is simple as they can be attributed as earned.
• This can be implemented by extending taxation to closely held corporations.

Taxation of income from Publicly Traded

• Taxing shareholders on income appears harder for this type of business.
• A ready alternative presents itself to the deferral problem, tax shareholders on a mark to market basis on their shares.

Mark to Market

• A normative ideal of a Haig-Simons income tax, supported by commentators to move administratively possible.
• It can exist in practice with US shareholders in foreign corporations.

Complexities of the Market

• Market to Market is complex, taxation of gains is likely to cause opposition.
• Administrative complexities are not likely to be larger and be offset as corporate taxation is repealed.

Benefits of a Corporate Tax

• Easier to collect tax from few corporations than several shareholders.

Defending Corporate Tax?

• Not clear as a normative matter why these shareholders should be taxed

Artificial Entity Defenses for the Corporate Tax

• Links the tax to a benefit provided by state and treats it as a benefit tax.
• Conceived as a payment for the benefits of incorporation and limited liability.

Problems with artificial entity

• Benefits go to non incorporated business so should not be taxed.
• State Government provides the benefits, not federal.
• No correlation between corporate income and benefits that are given, same benefits in limited liability with corporations that lose money.

Problems with artificial entity Part 2

• Benefits payment for liquidity created by a public equity market,
• No correlation with liquidy and the tax.
• In sum, The artificial entitites argument lacks conviction due the link between corporate tax and government and the small company’s.

Real Entity Defenses of the Corporate Tax

• Does not have much resonance
• Not tenable as it must follow to natural persons, or else the those income is subject to another level of tax, and because it is earned though a corporation.
• Is an organisation under control of corporate management.
• Makes decision to give economic resources, can be regarded as real corporation.
• Exist of corporate management, the agency cost problem.
• Line of argument is important as it applies to all publicly traded corporation.

Summary

• There is no defence on having corporate tax so mainstream thinking on double tax is fundamentally flawed.
• Alternative defence based on artificial entitites are on persusavie, causing people to think with low efficiency and should be repeated.
• Is politically resilience

Factors related to politically resilience on Corporate tax

• Ordinary and big corporations may do need to pay the tax, there income and burden people
• This dismissed all know taxes are not burdened to the same as it’s should.
• What people observe and relate closer to reality.

Factors related to Corporate tax

• Corporate Income
• Which added economics recourses under Corporations
• Is imposed on corporate income witch the adds to economic recourses to Corporations
• These recourses give management power, and there control gives economic, and political power.

1909 Act a Real entity measure

• Legislative debate was to due of the tariff
• High tariffs has extend to workers
• The increase progress and it’s conditions with the income to give.
• The tax by giving more to corporate management.
• With over all, that help balance companies and the state

1909 Act The 3 reasons has corporate tax instead general income and inheritance.

• Artififcal entity, Doing business by freedom entity, from partnership liability enjoyed

• Was easier to make money with the corporate, but over the years there more to the business.

• View the Corporations ability and made easy on that process. Has real entily Overtone as Taft probably did not emphasize, how to be more likely challenged with constutited issues. -The will federal government with a large portion with corporation

Power of Corporation

• Sources of abuses
• Impose to power, the government enable, to supply all services for restricting such manager abuses
• Aims of statement is relation on shareholder benefits conferred the state.
• Powers exercised and regard distinct beneficiaries.

Summary on Congress

• Proponents to show support with benefits from congress
• Opponent’s to take advantage of congress as that does effect to all power
• What is tax to take affect as the large corporations for the wealth of all

Problems in power

• Regulate power that is applied indiscriminate to corporations, the great trust.
• We regulate under amount of textions, We like as that the amount of power be injurious.

1894 and 1909 of the differences

• A change in corporate tax, the view was a continuation on civil right but now the mainly concept for the regular devices.
• Restrict manager power by publicity.

Corporate View

Supreme Court and the Corporate tax over time.

Account for changing

• Was viewed as device and was reason for the corporate tax.
• Period to make to from the American corporation. Dominated now and the managers are big

Transformation

• Merges and acquire to create the new law.
• Trust became to exist and that made people to get bad outcomes.

Summary with all

• Government must help the corporation
• All have support all the power
• And so forth

A Normative Perspective:

• Can we get this justify of the corporate power for today
• For all the follows reason is to go today