Zero Corporate Taxation

You can hardly pick up a paper without seeing articles about whether corporations are paying their fair share of taxes or are they avoiding taxation with offshore locations and companies.  Look at the recent brouhaha about Burger King.

Also, you can argue endlessly about what is the effective percentage of tax really paid by corporations, 10%, 13% or 20 versus the statutory rate, make comparisons to other countries corporate tax rates and then mix your so called statistics with unrelated unemployment figures and general figures about the economy.  Sounds convincing but in the end does not solve the problem.  Neither do these type of comparisons address the rest of the comparative countries’ tax system such as a vat tax and very high personal rates.

But none of this addresses the real underlying problem, the illogic of taxing corporations in the first place.

I believe that corporations should not be taxpayers.  They do not vote and therefore it is taxation without representation.  Rather each and every shareholder should pay taxes on their share of the respective income of the corporation whose stock they own.  We have such corporations now.  They are called “Subchapter S Corporations”.  They pay no tax.  Each shareholder receives a form K-1 (similar to a form 1099) which he or she uses to prepare their individual tax returns.

We now have the technology to expand Subchapter S status to all corporations. Think of it! No more tax avoidance analysts paid by GE, GM, Ford and Apple or the like.  Corporations would be pressured into increasing their dividend rates to cover the tax liability of their shareholders caused by their being taxed on the profits of the corporation they own.

One of the best kept secrets of our current tax system is that there is a way to ensure that the U.S.  Government isn’t cheated out of its taxes by foreign stock holders.  It is called withholding at the source, Internal Revenue Code Sections 1441 to 1443 and certain related statutes.  Foreign partners of U.S.  corporations currently have their taxes automatically withheld based on 30% of their reported share of the partnerships income.  This law already exists for S Corporation shareholders.  However non-resident aliens are not allowed to be S Corporation shareholders.   I wonder who put that clause in the law? If they were allowed the result would be much less offshore tax avoidance.

A representative of Vern Buchanan, Congressman from the 16th District visited my office to discuss this idea.  I believe they are still studying it.  Whether it will result in any tax reform recommendations I do not know.

For those who offer their advice regarding the market value or capitalized value of public corporations this change would represent a dramatic change in their thinking.  The advisors and portfolio managers and those who assign values to individuals companies would have to rethink their methodology.  They would have to remove taxes from their WACC (Weighted Average Cost of Capital) from their valuation formulae.  Then they will be confused by the sudden increase in corporation valuation indicated as corporations would no longer have the drag of taxes on their bottom line.  Corporations would no longer have to make tax based decisions.

The time has come for this approach to taxation to be enacted.  Too much time and money is wasted on pinning corporate goals against the goals of individuals.  They are one and the same.