Hartford Business Journal

28 Hartford Business Journal • December 23, 2019 • www.HartfordBusiness.com OPINION & COMMENTARY ECONOMIST'S PERSPECTIVE The liberal's case for eliminating federal corporate income taxes By Fred McKinney T he fight for the Democratic nomination for president has included some wildly progressive policy prescriptions. The most notable ones include Sens. Bernie Sanders' and Elizabeth War- ren's "Medicare for All" and Andrew Yang's "Universal Basic Income," aka the freedom dividend. These policies and others rely on dramatic changes in federal spend- ing priorities as well as changes in how these massive expenditures would be paid for. A common theme of the progressive candidates is to increase taxes on the wealthy. Without offering an opinion on these specific policies, or how they would be paid for, the case can be made that part of the liberal plat- form should include the elimina- tion of the corporate income tax. But before you choke on your latte, let me explain. Corporate income taxes paid to the federal government in FY 2019 amounted to only $225 billion, less than 7 percent of all federal tax rev- enues. Over 85 percent of the $3.4 trillion in federal tax revenues are paid in the form of personal income, social security and payroll taxes. While $225 billion is a lot of money, eliminating this source of federal tax revenue would hardly be missed, and more importantly can easily be made up. So, before Wall Street breaks out the caviar, let me explain. Conservative economists going back to Milton Friedman often argued for the elimination of cor- porate taxes based on the fact that corporations are not people, and only people can pay taxes. Progressives agree that corpora- tions shouldn't have political rights. The Supreme Court's Citizens United decision is wildly unpopular in liberal circles because the case grants corporations rights usually associated with "natural" citizens. The tax treatment of corpora- tions depends on the type of legal organization. Corporations come in different forms — C-corps, S-corps, B-corps, LLCs, LLPs, etc. It is the C-corporation whose taxes should be eliminated. The profits and retained earnings of C-corps are legally the property of share- holders. We should tax sharehold- ers, the actual people, and not the corporations they own. In 2018, corporations reported total profits of $2.3 trillion. By comparison total GDP was $19 trillion and per- sonal income represented about $15 trillion. By eliminating the corporate income tax and taxing shareholders of C-corps — the way shareholders of S-corps, or other pass-through companies are taxed — the federal government would more than make up for the loss of revenues from corporate income taxes, and simulta- neously eliminate hundreds of pages of corporate tax regulations and the armies of corporate tax attorneys and accountants that support this inef- ficient and ineffective tax system. Corporations currently have an av- erage effective tax rate of 10 percent compared to an effective tax rate on personal income of 17 percent. Taxing shareholders at 20 percent of corporate profits would generate over $450 billion, about twice the EDITOR'S TAKE Hartford needs action on taxes, not another committee H artford commercial taxpayers, don't hold your breath — the city is launching a new committee to study ways to increase the grand list and lower taxes on businesses. If you're thinking we've been here before, we have, many times. Hartford has empaneled numerous groups over the years to come up with recommendations to lower Hartford's stifling property tax rate, which is currently 74.29 mills, by far the highest in the state and one of the highest effective property tax rates of any city in the country. The lack of meaningful reforms over the years speaks to the com- plexity of the morass in Hartford. The latest commission will include 13 members who will likely be chosen starting in January when the new city council meets for the first time, said Councilman Thomas "TJ" Clarke II, who proposed the committee. "We need to figure out how to lower the commercial tax assess- ment rate so we can get more developers to come into the city to develop some of our vacant and blighted properties," Clarke told me. I commend Clarke for wanting to address the issue, but I'm skeptical any major reforms will come out of it. At least that's what past history tells me. Frankly, we don't need another committee — we need an actionable plan. There are no silver bullets for solving the tax and financial issues Hartford faces and the only way for the city to reverse course is through a grand bargain among the state, city, property owners and others. Most likely everyone's ox must be gored in order for a sustainable, long-term solution to be achieved, and that's not always a politi- cally expedient path to take. The city's small businesses in par- ticular have felt enormous pressure from the high property-tax rate, part of the reason key commercial avenues — Franklin, Maple, Main, Albany, etc. — in various neighbor- hoods have lost their luster. Greg Bordonaro. Editor Fred McKinney

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