I Come Not to Praise the Corporate Income Tax, But to Save It

Abstract:     
United States Federal income taxation of business activity has long been characterized by partial double taxation: some business income generated by certain business entities is taxed twice (once when it is first generated by the entity, and again when it is distributed by the entity to some ultimate owner), and some business income generated by business entities is taxed only once. This article examines possible justifications for partial double taxation, to see whether they can explain the current scope of such double taxation, and finds them generally wanting. It argues, however, that the problem lies not with the concept of double taxation (there are, in fact, any number of bases upon which partial double taxation could be justified), but rather with its current implementation.

Accordingly, the article proposes a fix. Given that a desire to partially double tax is clearly evidenced by history, but that the current structure of such double taxation is impossible to justify, it seems fruitful to adopt the broadest possible justification for partial double taxation and to enact a tax code that implements such justification. The article proposes as the broadest possible justification for partial double taxation "the theory of the firm." That is, business conducted in entity form reaps benefits that can not be enjoyed by business not conducted in entity form, and the ability to enjoy such benefits is a basis that will support partial double taxation. The article then demonstrates how to construct a robust entity income tax in light of this justification.

Keywords: Corporate, income, tax, policy

JEL Classifications: K00, K34

Accepted Paper Series