With good reason, the Obama administration's Internal Revenue Service has come under fire for targeting conservative and tea party groups. As Kimberly Strassel demonstrates in The Wall Street Journal, Obama and other top officials themselves created the environment that resulted in the corrupt and abusive practices. Heads should continue to roll at the IRS. That said, no number of firings, laws, or regulations could ever assure that similar IRS abuses won't happen again. In fact, they're inevitable so long as a government agency has the power to decide what gets certified as a not-for-profit organization. The best long-term solution, therefore is something much more radical: the abolition of the corporate income tax. For all of its populist appeal, the corporate income tax is arbitrary and exempting some organizations from paying it is equally arbitrary. Abolishing the corporate tax altogether would supercharge the economy and wouldn't serve any particular set of political interests.
Let's begin with one basic fact: corporations don't ever pay taxes themselves. Every dollar in tax that gets charged to a corporate treasury will ultimately end up being paid by an employee, a shareholder, or a consumer. Although circumstances differ, furthermore, employees are typically the most vulnerable of these three groups. Consumers can always buy from a competitor and stockholders can easily sell the stock. Unless they have skills that are in enormous demand, however, employees have to go through a long job search. Indeed, one study from Harvard and the University of Michigan finds that workers pay as much as three-quarters of all corporate taxes. In the end, however, research can only show so much. The very fact that complex and likely economic analysis is necessary to show who pays the tax shows just how arbitrary the corporate tax is.
And, while the overwhelming majority of non-profits do good works of some sort, hardly any truly deserve special treatment. After all, they really are businesses: Unless they have huge endowments, all non-profits need to earn revenues each year in excess of expenses in order to continue operations. Furthermore, almost all non-profits organizations -- including the one that I run -- do things that reasonable people will find objectionable. For example, the Salvation Army, the country's best known human services charity, is a theologically conservative Christian church that opposes abortion in almost all cases and stands against same-sex marriage. If every organization that angered someone were to be denied preferred tax status, hardly anybody would have it at all.
Getting rid of the corporate tax would free up nearly $300 billion a year for corporations to raise wages, increase dividends, and make new investments. The United States currently has the second highest marginal corporate tax rates amongst wealthy nations in the Organization for Economic Cooperation and Development. This scares away investment and makes it harder for U.S. companies to compete on the global stage.
While the appeal of total corporate tax elimination may seem most obvious to my fellow political conservatives -- it would increase economic growth, expand freedom, and reduce the role of government -- it also ought to have a fair amount of appeal for progressives too. With no corporate income tax, corporations' overall incentive to play politics would decline sharply. And it's also reasonable to raise some other tax to make up the revenue lost through corporate tax elimination. While I'd personally prefer a tax on carbon pollution as a straightforward tax swap, higher marginal tax rates on the successful could certainly be part of a political conversation too. And some commonsense tax policies like taxing all benefits as income -- a good idea in any case -- would also become part and parcel of any corporate tax cut. And, much to the delighted of progressives, a system without any corporate tax would need to retain a capital gains tax.
The entire corporate tax system is broken. Allowing the government to define what is and isn't a "non-profit" opens the doors to abuses. Abolishing the corporate tax altogether makes a lot of sense.