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The John Locke Foundation
is a501(c)(3) nonproft, nonpartisan researchinstitute dedicated to improving public policy debate in North Carolina. Viewpoints expressed by authors do not necessarilyreect those o the sta or board o the Locke Foundation.
200 W. Morgan, #200Raleigh, NC 27601
phone:
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good deal of discussion of late has centered on reforming North Caro-lina’s tax code, and that is a good thing. There is no aspect of NorthCarolina’s tax system not in need of signicant change. The currentcode penalizes worker productivity while placing multiple layers of taxation onsaving, investment, and entrepreneurship. Members of both political partiesare acknowledging these arguments, and there seems to be a real possibilitythat in the coming few years we could see signicant changes made to NorthCarolina’s tax code.
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Nevertheless, there is one aspect of North Carolina’s system of taxationthat needs more than reform, and that is the state’s 6.9 percent tax levied onthe income of corporations. The corporate tax should be repealed, not reformed.
No. 416 – November 8, 2011
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Repeal, Not Reorm
k :• he corporate income tax imposes a second and evena third layer of taxation on people’s incomes and is hidden, dishonest, andinconsistent with informed decision maing in a free and democratic society.• North arolina has had a corporate income tax since 1921. Between 1921and 1991 the rate increased from 3 percent to 7.75 percent. It was then low-ered every year between 1997 and 2000 to its current rate of 6.9 percent.• he corporate income tax is riddled with special exemptions meant tofacilitate government manipulation of the economy.• he corporate income tax is based on the myth that corporations actuallypay taxes. In fact ,corporations not only do not pay taxes, they cannot paytaxes.• ll taxes “paid” by a corporation must come out of real people’s wallets orban accounts. hese real people are shareholders, employees, and custom-ers.• In order to mae intelligent voting decisions, citizens need to be aware of how much their government is costing them. he corporate income tax is adeceptive tax because it is invisible to those who are paying it.
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It violates all basic principles of sound economic policy and opengovernment. It not only imposes a second and even a third layertaxation on many people’s incomes, but it is hidden, dishonest,and inconsistent with informed decision making in a free anddemocratic society.
Why Not Reform? orporate Income axes s a ool of entral Planning
Leaving the corporate income tax in place and lowering therate (i.e., reforming the tax) would not solve the problems intro-duced by the tax. As will be discussed, the problems brought bythe tax are part and parcel of its fundamental nature, and whilelowering the rates could ameliorate its negative impacts on thestate’s economy and political process, its corrupting features willremain as long as it remains in place and continues to be col-lected. Furthermore, if history is any gauge, rate reductions willonly be temporary.North Carolina has had a corporate income tax since 1921,and its history shows clearly that there is no such thing as a per-manent rate change. Between 1921 and 1991 the rate increasedsteadily from 3 percent to 7.75 percent. It was then lowered everyyear between 1997 and 2000 to its current rate of 6.9 percent.Politicians have viewed the tax since its inception as one theycan and should manipulate. While theoretically the tax is leviedon all for-prot corporations doing business in the state, in realityit is riddled with special exemptions meant to facilitate govern-ment manipulation of investment and business activity, usuallyin the name of “economic development” or, more recently, “energyefciency” or environmental protection.Most of the major economic incentive schemes launched byNorth Carolina state government have centered around grant-ing exemptions from the corporate income tax in the form of taxcredits. They have included everything from building recycling fa-cilities and installing solar power plants to using the state’s ports(see more complete list). The political mode of operation is to taxcorporations generally at a relatively high rate and then use ex-emptions from the tax as a way of subsidizing favored or politi-cally correct businesses. Politicians have come to see the tax as away to gain power over market outcomes through the process of granting exemptions.In light of all that, the corporate income tax is best viewed asa type of “negative slush fund.” Instead of using a stash of already
North arolina’s orporateIncome ax redits
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Business and nergy ax redits
−Investing in Business Property −Renewable Energy Property −Constructing Renewable Fuel Facilities −Small Business Employee Health Insurance −Biodiesel Producers −Work Opportunity −Donations to Nonprot Organization or Unit of State or Local Government for Acquisition of Renewable Energy Property
ax Incentives for Recycling acilitiesHistoric Rehabilitation ax reditsLow-Income House ax reditsResearch and Development ax reditax Incentives for Major omputerManufacturing acilitiesax redits for Growing BusinessesMill Rehabilitation ax reditax Incentive for Railroad IntermodalacilityGeneral ax redits
−Dwelling Units for Handicapped Persons −Construction of Cogenerating Power Plant −Real Property Donated for ConservationPurposes −Conservation Tillage Equipment −Gleaned Crop −Certain Telephone Subscriber Line Charges −Supervisory Fees Paid by Savings and Loan Associations −Use of North Carolina Ports −Poultry Compositing Facility −Manufacturing Cigarettes for Exportation −Manufacturing Cigarettes for ExportationWhile Increasing Employment and UtilizingState Ports
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collected tax money to subsidize favored busi-nesses and political allies directly, the politiciansallow favored business interests to keep more of their own money than the tax would otherwise in-dicate. Ultimately, the corporate income tax is nota tool of taxation but a lever for centrally plan-ning the state’s economy.
he Myth: orporations Pay axes
The corporate income tax is based on the myththat corporations actually pay taxes. In fact, cor-porations not only do not pay taxes, they cannotpay taxes. The argument isn’t that corporationsshift the tax burden onto consumers or workersor shareholders, but that it is conceptually impos-sible for corporations to pay taxes. A corporation is a legal and accounting entity.They can’t pay taxes; only people can. It’s the ipside of the fact that all revenues that ow to acorporation ultimately ends up in some real per-sons’ wallets or bank accounts: all taxes “paid” bya corporation must come out of some real persons’wallets or bank accounts.Here are the people who pay corporate income taxes:•
hareholders.
They pay through reduced dividends and capital gains. For those who are investing outside thecontext of a tax-free Individual Retirement Account (IRA) or 401(K) retirement plan, the corporate tax imposes athird layer of taxation on their investments. When their principle investment is taxed as regular income, it alsoreduces any investment returns that investment can generate. That is the rst layer. The tax on dividends andcapital gains is a second layer. The corporate tax, by reducing the revenues available for dividends and by reducingthe overall value of the corporation, imposes a third layer of taxation on that income stream.For those investing within the context of an IRA (either a regular or Roth) or a 401(K), where either the prin-ciple or the returns to the investment are tax-exempt, the corporate tax imposes a second layer of taxation.
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•
orporate employees.
They pay in the form of lower wages. Since their wages are already reduced by the stan-dard income tax, the corporate tax imposes a second layer of taxation on wages of corporate employees. (Also, ithas the negative effect of reducing employment opportunities for workers in general.)•
ustomers.
They pay in the form of higher prices. That payment comes as an additional layer of taxation, of course, to the sales tax rate paid in North Carolina, depending on the county, of approximately 7 percent.The bottom line is that those who argue for increasing corporate income tax rates, claiming that corporations are“not paying their fair share” of taxes, are really charging that shareholders, employess, and consumers are all beingundertaxed.
omparison of orporate Income ax Rates
Source: Tax Foundation
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Spotlight 416 The Corporate Income Tax: Repeal, Not Reform
Key facts:
• The corporate income tax imposes a second and even a third layer of taxation on people’s incomes and is hidden, dishonest, and inconsistent with informed decision making in a free and democratic society.… (More)
• The corporate income tax imposes a second and even a third layer of taxation on people’s incomes and is hidden, dishonest, and inconsistent with informed decision making in a free and democratic society.… (More)
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