Corporation tax may not vanish, but it's shrinking

When President Reagan last week said the corporate income tax ''was hard to justify'' and that its abolition was ''something to study and look at,'' it caused a considerable fuss. In fact, White House spokesman Larry Speakes, while denying such a move was under consideration, accused the press of ''licking your chops and clapping your hands and doing back flips'' over the President's off-the-cuff remarks.

Whatever, the fact is that Congress and the President are already in the process of drastically reducing, if not abolishing, the corporate income tax. Through the introduction of various ''preferences,'' such as the accelerated cost recovery system introduced by the Economic Recovery Tax Act of 1981, the corporate income tax has been declining in its importance as a source of federal revenues. Back in fiscal 1977, it provided 15.44 percent of Uncle Sam's revenues; in fiscal 1982, ending last Sept. 30, it provided only 7.97 percent. (See table.) And in the years ahead it will provide even a smaller proportion of the government's income.

Joseph Pechman, an economist at the Brookings Institution, notes that the tax is already ''virtually eliminated'' for many industrial companies able to take good advantage of such loopholes as investment tax credits or the accelerated cost recovery system.

The tax could remain of some importance, however, for corporations in banking and finance or other services where capital expenditures are less vital to their activities.

In practically all cases, the maximum tax rate of 46 percent for income above

The President dropped his idea of eliminating the corporate income tax like a hot dish, because of its political risk. Most people still think of the rich as being the prime beneficiaries of stock ownership. House Speaker Thomas P. O'Neill Jr. quickly accused the President of showing that ''his heart was still in the corporate board room.''

Actually, the latest survey (1982) by the New York Stock Exchange shows that 32.25 million people, or about 14.4 percent of the total population, directly own stock. Another 133 million are not direct owners, but have an indirect interest in stock through pension plans, life insurance policies, and other financial intermediaries. So some 3 out of every 4 American men, women, and children have some stake in US corporate enterprise and the stock market.

A 1980 study indicated that some 35.4 percent of stock listed on the New York Stock Exchange was owned by institutions. Of the remaining individually owned stock, a highly disproportionate share is owned by the rich.

For economists, the problem is that they aren't sure who really bears the burden of the corporate income tax. Is it the stockholder, the corporate employee, or, through prices, the consumer of the corporate goods and services?

This issue, said Alan Auerbach, a Harvard University professor, is still unresolved, despite years of economic research. Brookings's Dr. Pechman and Charles McLure of the Hoover Institution, in California, figure it is a tax on capital, that is, on shareholders.

With the diminution of the corporate tax burden, however, the issue is of lessening importance.

During the Carter administration there was at one point serious consideration of the integration of the corporate and personal income taxes. To economists this makes more sense than the abolition of the corporate tax.

One such system would have a company not pay any taxes, but have it pass on the tax liability for both dividends and retained earnings to its shareholders. Or the corporation could pay some tax, and the shareholder would take account of this and pay tax or get tax rebates depending on his or her individual tax bracket.

Canada has a system where collectors of dividends can take account of corporate taxes paid in their own tax bills. Several European nations also provide complete or partial relief for individual dividend recipients on the amount of taxes paid by the corporations.

This system would avoid the problem of ''double taxation'' which troubles President Reagan, that is, the payment of taxes on corporate income and then the payment by shareholders of taxes on dividend income.

One problem would be what to do with the current corporate tax loopholes, such as investment tax credits or accelerated depreciation. Would these benefits be passed on to shareholders or not?

Any system of integration would need to be extremely complicated to work well. ''Complete integration has some very tough administrative problems,'' Dr. McLure noted.

According to Dr. Pechman, Treasury did think about the idea and eventually rejected it as ''impractical.''

What seems more likely in the way of dramatic tax change is an effort to put more emphasis on a consumption tax, vs. an income tax. That, says Dr. McLure, is ''where we are headed.'' Martin Feldstein, chairman of the President's Council of Economic Advisers, may talk about that in his forthcoming annual economic report.

Under such a system, people would be taxed on what they spend. Savings would be tax free. The idea is to encourage savings so as to provide a larger pool of resources for investments that would yield higher future incomes.

Dr. McLure notes that the liberalization of individual retirement accounts and Keogh plans has moved the nation in this direction. Now the President is talking about allowing individuals to establish a tax-free fund for savings for the education of their children.

Whether these ideas get anywhere remains to be seen. But there probably hasn't been the same willingness in Washington to consider drastic tax changes for decades. Corporate income tax -- a declining revenue source+

1977 '78 '79 '80 '81 '82 Net corporate income taxes* (billions of dollars) $54.8 60.0 65.7 62.6 61.1 49.2 As a percentage of total tax revenues 15.4% 15.0 14.2 12.5 10.2 8.0 * Gross corporate cash collections less cash refunds Source: Tax Analysis Division, Department of the Treasury

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