Abolish Somebody’s Taxes

Following up on yesterday’s article highlighting Arthur Laffer’s idea that an 18-month tax holiday would have cost less than the stimulus and achieved a 2.5% unemployment rate already, today we look at a similar idea: abolishing the corporate income tax forever.

Bill Frezza wrote yesterday that the government should not distinguish between so-called “good” and “bad” industries, it should just abolish all corporate income tax. That represents about 12% of federal tax revenue, so it would cause a hit to the national balance sheet. However, Frezza sees the following unfolding in the tax-free environment:

Business investment would explode. Trillions would come out from under the metaphorical mattress to create jobs, finance growth, fund innovation, build factories, and beat back foreign competition. Trillions more would flow in from investors from high tax countries around the globe looking for better returns. High paying expat jobs would come back to our shores and the net wage advantage enjoyed by cheap foreign labor would be diminished. The job market would get so tight we would be begging immigrants to show up rather than chasing them away with pitchforks. America’s growth rate would leap into the double digits rivaling emerging nations. Billions of deadweight dollars spent twisting businesses into pretzels to reduce their tax bills would be freed up to grow the economy. And finally, the stock market would take off like a rocket shoring up all those underfunded pension plans and anemic 401(k)s.

I don’t know, though. Doesn’t it bother you that corporations receive the lion’s share of federal dollars, receive taxpayer-funded bailouts, and currently pay just 12% of federal tax revenue, but under this idea would get those benefits without paying anything into the coffer?

I’ve seen similar tax cutting or tax eliminating ideas directed at individuals, and those make more sense to me. Individual income tax returns have become unbelievably complicated, the stuff of corporate accounting departments, really. Why not relegate them to the pros by eliminating individual income taxes and extracting more taxes from banks, oil companies, and missile makers? That would free up a lot more money for discretionary spending, and America would be able to cherry-pick from among the world’s brightest workers who would beg to labor within the borders of a tax-free America.

It would also energize the small business sector, which is the true engine of economic growth and job creation. I know that if my income taxes went to zero, the first thing I’d do is redirect all that former tax money into new businesses. Half the nation would become angel investors overnight. It makes me tingle just thinking about all the small businesses I could fund every year with the fat checks I now send down Washington’s swirling toilet.

You know what else it would free up? All the energy we entrepreneurs now waste finding loopholes and tax-limiting strategies to protect our income from government’s clutching hands. This is no small benefit. I bet productivity would jump 20% just by freeing up the mental labor now going toward tax defense.

We may disagree on details, but one thing most of us can agree upon is that cutting taxes dramatically somewhere somehow would have done a lot more than the expensive stimulus has done.

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  1. Posted July 14, 2010 at 2:15 am | Permalink

    Daniel and Chris, thanks for being onboard! I like very much the fair tax ideas, and love taxes tied to consumption.

    It aligns everything to be financially healthy for a society. If a person makes enough money to make big purchases, then they are self-flagging themselves as able and willing to pay more tax. If a person has lower means or a desire to consume less, they control what they pay in taxes. Beautiful. Plus, attaching tax to consumption makes it as simple as can be. No forms, no calculations, just a percentage added automatically to the price of the item.

    A fringe benefit is that savings would amplify as people enjoyed more income. That base of capital would allow business investment without debt, which would make society much better off.

    However, as I’ve pointed out repeatedly, the very reason this will never happen is that the debt-based society is not accidental, it’s deliberate. Government, banks, and big business want you in debt so you have to work a job that generates automatic tax revenue with little control. Imagine how different banking would look if the default American lifestyle required and used little credit. Far less profitable, that’s for sure.

    Society won’t change. We have to change our lives to live in a more financially sound way.

    Posted July 14, 2010 at 2:04 am | Permalink

    Jason Kelly-
    I mentioned this in the previous post, but what do you think about the FairTax? I mention this because I like the idea.

    It’s a flat 23% tax rate based on what we buy. I love that it’s an incentive for the nation and I to work as much as we can, invest, save, and become debt-free. You only pay taxes on what you consume, the more you buy the more taxes you pay, the less you buy the less taxes you pay. It does away with all other taxes, personal and corporate.

    I’m also frustrated by the complexity of the current system. It seems like I’m nickel and dimed by taxes (federal, state, city taxes, candy tax, soda tax, property, death, investments long and short, special mall tax rate in certain areas, stadium tax, entertainment tax, etc.). I also don’t like all the tax breaks and exemptions (marriage, children, mortgage, etc.). As it is now I have to pay a CPA to do my taxes as seem quite complicated w/ wages, rentals, investments, write-offs, depreciation, etc.

    Chris McIlroy
    Denver, CO

    From the site: “It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

    The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.”

  3. Daniel
    Posted July 14, 2010 at 12:05 am | Permalink

    Jason, I agree with you 100%. A 12% tax rate is fine for businesses; it is the personal income tax that is crippling America. Even if, for stupid political reasons, no one ever steps forward to abolish it, we can at least simplify it. Why don’t we have a flat personal income tax of, say, 10%, with no deductions of any kind? This is a truly fair tax. Businesses could continue to withhold tax payments from worker paychecks, and the added benefit would be that only those who had income outside of a “dayjob” would be required to file a tax return each year.

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