Don't Raise the Bridge, Lower the River

Pete Davis has found the culprit: the "subsidy" (as he calls it) of corporate debt via the deductibility of interest paid by corporations.

The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study. See Table 1. That negative tax rate is the root of the fiscal crisis. Taxpayers paid a large subsidy for Wall Street investors to take those risks.

It's a respectable point, for the presentation is remarkably unsophisticated for so sophisticated a website. Anyone who cares enough to read either this post or the original will see the problem: why do we tax any returns on corporate investment at the corporate level rather than simply taxing the recipient. And more precisely, why do we let debt go free while taxing (i.e., t the corporate level) returns to equity? There is a huge, incoherent inconsistency here, but we could get rid of that by simply abolishing the taxation of "profits," aka returns to equity, i.e., abolish the corporate income tax.

The whole topic is (like, I suppose, anything in taxation) a dog's breakfast. Other people know this far better than I but I take it that our attitude is rooted in the idea that (a) a corporation is a "person;" and (b) payments to debt are an "expense" rather than a return on capital. Both of these ideas seem to me to be wrong; the second, egregiously wrong. Still I have to admit that on my list of curable evils, the corporate income tax does not have a high priority. Indeed if we are doing away with inconsistencies, I'd far rather get rid of the personal mortgage interest deduction which I suspect has done more harm than the corporate.

Idle Afterthought: So many people have had their knickers in a twist over corporate personhood since the decision of the Supreme Court in Citizens United v. the Federal Election Commission, sanctifyng corporate spending in election campaigns. I wonder, as to those who decry the idea of corporate personhood that underlies Citizens United--would they agree also that (since a corporation is not a person) it shoud not be taxed?