Periodically Congress takes a look at the corporate tax rates and, depending on where public opinion is at the time, either raises or lowers the corporate rates. The problem stems partly from the two views of what corporations really are. Corporations are a legal fiction that we have created to facilitate the large scale investment needed to fund businesses that need huge amounts of capital. Many of our laws treat corporations like people in order to be able to deal with them more easily. This legal fiction fools some of us into thinking of corporations as real people, and indeed sometimes they act like real people. Corporations, however, are not real people and no matter how many levels of parent and subsidiary corporations you have, ultimately it is individual people that own all property.
Those who believe that corporations are people think that corporations should pay a high level of tax, and those who believe that corporations are conduits to real people think that corporations should pay little or no tax. I understand that corporations are mere conduits to real people and that ultimately real people own all property. Therefore people should pay the taxes. However, I recognize that without some limitations, corporations could hold profits inside the corporations, avoiding taxes for a very long time. In the Great Depression Congress realized that public policy is best served if corporations distribute any profits not needed for normal business operations and planned expansion, so they passed the Excess Profits Tax to tax corporations at a punitive rate if they hold onto profits that they do not need in the business. The Excess Profits Tax needs to be beefed up to insure that all un-needed funds are distributed to their owners, and if this is done, the corporate tax rates should be lowered. Lower rates will make us more competitive on the world market and will put more return in the hands of the shareholders who will pay the taxes owed.
I believe that some of the demand for high corporate tax rates is a response to the bad behavior of some corporate managers. I believe that corporate managers should be held more responsible for their actions. If corporate managers act illegally or unethically they should be held accountable and should not be able to hide behind a corporate shell. But the tax system should be used as a source of revenue, not a means of punishing bad managers. We have tried to regulate so many aspects of society with the tax code that we have created an unbelievably complex system. Let’s put the tax burden on people, the real owners of property, and regulate bad behavior within other areas of the law.
Loren L McCann, CPA, MS (TAX)