Replace Corporate Profits Tax with a Capitalized Value Tax
Like most other developed countries, the United States raises revenue by taxing corporate profits. Through ever more clever manipulation of tax loopholes, such as holding profits overseas, few corporations pay the nominal marginal rate of 35 percent of profits. Indeed, many highly profitable companies find ways of avoiding paying any corporate income tax at all. Such efforts to avoid taxes waste resources, not just the time of those hired to minimize tax payments, but also by distorting investment and other business decisions. Avoidance is possible because of the complexity of the tax provisions for assessing profits, which are not directly observable. In contrast to profits, the capitalized value of corporations is much more observable. Rather than taxing profits, a less distorting and more equitable approach to raising revenue from capital would be to tax the capitalized value of corporations.
Currently the capitalized value of publicly traded U.S. corporations is about $25 trillion dollars. An annual tax of about 1.5 percent would generate over $375 billion, somewhat more than the current annual federal revenue from corporate income tax. Those of us who are homeowners are used to paying local property taxes of roughly this magnitude. If our personal capital is being taxed at this rate, then why not also tax other capital at this rate as well?
Here’s how it would work in practice. At the end of each trading day, the capitalized value of each publicly traded corporation would be recorded based on the closing stock price and the number of outstanding shares. The corporation would be assessed a tax of 1.5 percent of the daily average of capitalized value over the year. That’s it for corporate compliance––a few careful accountants could replace an army of corporate tax lawyers.
To remove incentives for corporations either to locate offshore or to avoid going public, the tax would be combined with a couple of changes to the individual income tax. Individuals would pay the 1.5 percent tax on the value of their stock holdings of companies that do not already pay the tax. This would include foreign-based corporations and U.S. corporations not publically traded. Individuals would self-report a declared stock price. Individuals who sold these stocks would pay a capital gains tax on the difference between the sale price and the last declared price. Firms that offered portfolios would pay the tax for non-publicly traded U.S. corporate stocks so that few individual taxpayers would actually have to make payments in their own tax returns.
Replacing the corporate income tax with the capitalized value tax would be a radical change that may be too difficult to achieve politically. However, if it were once achieved, it would make the corporate tax regime much more transparent and less subject to the lobbying for special provisions that favor specific industries or sometimes even single firms. It would thus create a better political economy for business taxation.
Could the corporate value tax ever be politically feasible? From the conservative perspective, it is consistent with the belief that markets correctly value corporations. It also provides a radical simplification that could not be matched by any conceivable change to the profits tax. However, to obtain the full reduction in compliance costs, the federal government would have to induce states to abandon their corporate taxes, perhaps through some sort of revenue sharing. From the liberal perspective, it would ensure that all corporations pay some tax and reduce the incentive for corporations to be involved in politics. However, to preserve reductions of compliance costs and transparency, they would have to forgo using the corporate tax code as a vehicle for implementing social policy, such as through charitable deductions or credits for favored activities.
The current corporate tax on profits has accumulated many provisions over the years to promote both values and interests. Not only do these provisions make the tax complex and opaque, but they mean that hundreds or even thousands of stakeholders will be trying to influence the details of any proposed reform. These stakeholders would also assess their interests in considering a switch to a corporate value tax. While both reform within the existing framework and a radical switch to value taxation pose great immediate political challenges, value taxation would promote a more rational political economy in the long run.
David L. Weimer is the Edwin E. Witte Professor of Political Economy, University of Wisconsin-Madison. He originally prosed a version of value taxation in “A Better Corporate Tax?” Journal of Policy Analysis and Management 21:4 (2002), 693–696.