In December of last year, Congress passed, and President Trump signed, the Tax Cuts and Jobs Act (TCJA). The legislation, among other things, cut the top marginal rate of the corporate income tax from 35% to 21%. This was a huge step forward in making USA competitive on the world stage. But it did not go far enough — the corporate income tax should be repealed entirely. If revenue neutrality is a concern, then other sources can be made to offset the relatively small portion of the tax base brought in by the corporate tax; however, eliminating the inefficiencies and distortions it causes are of paramount importance.

The problem with corporate taxation is not solely — nor even primarily — that of an ethical concern regarding “double taxation” of corporate profits. Rather, the more salient problem is that of international competitiveness and economic efficiency. In the name of equality, it taxes the wealthy by way of an abstraction; like the Romans who made a desert and called it peace, the corporate income tax destroys efficiency and calls it fairness.

More specifically, there are three primary economic arguments in favor of eliminating the corporate income tax:

  1. The current structure and relatively high nominal rates of corporate taxation in the United States are still uncompetitive on the world stage;
  2. Imperfect observability of internal corporate operations ensures that real corporate profits may be difficult to detect (and therefore large, wealthy corporations can use accounting rules and crafty tax attorneys to disguise much of their income from the taxing authorities); and,
  3. The current method of corporate income taxation is asymmetric between profit and loss—as well as debt and equity—and therefore almost certainly changes preference rankings of alternative investments, on the margin.

There are several problems with proposed reforms, to be sure. Shareholders might receive a windfall from higher share prices and higher eventual distributions.  Corporate-level collection may be administratively more efficient. Without reform of the realization requirement on appreciation in the value of capital assets, repealing corporate-level collection could turn corporations into tax-free savings accounts for investors. Moreover, it may be difficult to coordinate taxation of publicly traded and private corporations, as well as to value financial positions in public companies that are not sufficiently traded as to have readily discernible market prices. These concerns are all appreciated. However, they are by no means prohibitive of repealing the corporate income tax. This is because the entity-level income tax is an inefficient and costly anachronism. It was perhaps appropriate for an era where large corporations either manufactured goods with immobile capital inputs, or engaged in financial activities, which only a handful of relatively homogeneous nations had the infrastructure to support, but it is not irrational and destructive to a modern economy.