April 2016 Brief: Volume 23, Number 10
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Eliminate the Iowa Corporate Income Tax!
by Dr. Don Racheter
What do you think corporations do when they are hit with a new tax? Take the money to pay the tax from the salaries and fees of the members of the board of directors? Take the money from the cornucopia in the basement of their headquarters building? Raise prices of the goods and services they produce, thus passing the cost on to consumers? Lower wages for the workforce of the corporation? Reduce stock dividends, thus cutting the return on investment for stockholders (including retirement accounts)? Some combination of the last three options?
Newsflash: Corporations don’t have piles of money lying around to pay increased taxes! They have to get the money to pay the government by increasing their revenue (raising prices on the goods and services they provide), reducing their costs (laying off workers or paying them less), or some combination of these two strategies. There are no cornucopias spewing forth free goods and services they can tap into, and even if they cut the salaries of all the board members and managers to zero, it would not cover the costs they incur from current corporate taxation. In effect, the corporation is just a collection and pass-through agent for the Department of Revenue.
So why not eliminate the sham, abolish corporate taxes, and just raise taxes on people, the only real source of income for the state? Because most voters and taxpayers are what the media refer to as “low information” people – they don’t pay much attention to politics and government, they don’t understand basic economics, and they don’t understand the problem of “concentrated benefits and diffused costs” that the special interests use to win benefits from government at taxpayer expense.
Moreover, most ordinary, uninformed citizens are happy to “stick it to the big corporations” so their tax rates can artificially be held lower. They never catch on that if you count the lower salaries corporations have to pay, and the increase they make in their prices so they have the money to pass along to the state, citizens’ actual tax rates, as opposed to their nominal rates, are much higher than they think.
Politicians and bureaucrats know this, but they keep quiet out of self interest. As P. T. Barnum once put it, “There’s a sucker born every minute.” People want to believe that someone else is paying for the governmental goods and services they receive. If they truly understood that all the money they are receiving was being taken out of one of their pockets, and coming back to their other pocket with a substantial reduction for the overhead of government, there might be another American Revolution!
What would happen if we could “lift the veil of ignorance” and eliminate the corporate income tax? Several things, all good from the point of view of the average worker, consumer, and taxpayer. Taxpayers would see their rates go up in the short run, but this might actually wake them up to the true costs of the waste, fraud, and abuse in many government programs. They might be motivated to demand accountability and reform, which would benefit them in the long run.
Corporations would have more of the money they earn to pay workers higher wages, and even more important, more capital to invest in new and improved production processes so they could “do more with less” and increase future profits. Consumers would benefit from lower prices, and in the long run, from more goods and services from the expanded economy.
And paradoxically, even government would be better off, by having more revenue coming in – we know from the times when significant tax rate reductions were made in the Harding/Coolidge, Kennedy, and Reagan administrations that the economic booms which followed meant more tax revenue even at the lower rates because the number of people working and paying taxes increased.
So let’s lead the way and abolish the Iowa Corporate Income Tax! If one looks at those states which do not have a corporate income tax, they manifest more economic investment and growth than we do. It simply makes sense that corporations are more likely to move to, or expand in, a state which takes less from them in taxes (and regulatory costs). Iowa needs to become a leader in attracting new businesses so we have jobs to keep all the young people we are educating – at great taxpayer cost – here instead of exporting them and their human capital to other states in the union.
Dr. Don Racheter is President of Public Interest Institute, Mount Pleasant, Iowa. Contact him at Public.Interest.Institute@LimitedGovernment.org.
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