Friday, June 17, 2011

Martin Sullivan Joins the Cause to Change Corporate Taxes to Flow Through

Cautionary Note:  Boring Article to Follow

The Dismal Political Economist has long been a strong supporter of taxing corporations.  They are large wealthy organizations, they are considered “a person” in the law, they make lots of money and they enjoy tremendous benefits from governments at all levels.  Taxing corporations also gives a patina of “fairness” to the tax code, an important consideration in a democratic society.

Recently, though The Dismal Political Economist has come to the position that the Corporate Income Tax must go.  Actually, it not so much that he has come to this position as that this position has come to him.  Large corporations, particularly multi-national ones can escape a large portion of the corporate income tax, and smaller ones either pay a rate substantially above the large ones, or have significant compliance costs in order to minimize the tax.  The Corporate Income Tax is largely repealing itself.

To replace the Corporate Income Tax The Dismal Political Economist’s suggestion is to tax all businesses as flow through entities.  The Dismal Political Economist was pleased to find that one of the top tax experts in the country Martin Sullivan has come to a similar conclusion.  Mr. Sullivan makes a strong and substantial case  (thanks are due to TaxProfBlog for the reference) for terminating the corporate income tax and replacing it with a flow through of business income to its shareholders or partners.  Each shareholder wold report his or her share of the corporate taxable income as income to themselves.  This is the way that S Corporations and Partnerships are taxed.

Mr. Sullivan has an impressive background and he is very well qualified to speak on this subject.  He alludes to the political problems of making the change, and does not address the practical aspects of the change.  The political problem is that many in the opposition to the idea will contend that this allows corporations to go tax free.  It does not, the shareholders of the corporation, who in theory (and in fact) are the beneficial owners of the income of corporations will pay the tax on the corporate income.

The practical problems are also severe.  As a Tax Consultant, The Dismal Political Economist has first hand knowledge of the complexity of allocating taxable income to the individual owners and then taxing it.  A simplified system will have to be developed, which fortunately for readers who have struggled to get this far, is the topic for another day.    Until then, The Dismal Political Economist is happy to join the distinguished company of Mr. Sullivan.

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