Corporate Tax Shakedown

There ain't no victory at sea 
Unless it's mutiny
--Jay Ferguson

Peter Schiff demonstrates the oppressive nature of the US corporate tax system. Let's have a look.

Assume a US corporation earns $1,000,000 in a year. Taxed at 35%, the corporate keeps $650,000 while the government pockets $350,000.

This is a tax on shareholders because those shareholders had rightful claim on the $million profit.

If the corporation pays dividends at a 40% payout ratio, then shareholders get $650,000*.4 = $260,000. The remaining profits, $650,000 - $260,000 = $390,000 is called 'retained earnings' and is kept with the corporation as resources to generate future economic value and perhaps future dividends for shareholders.

At current tax rates, shareholders pay $260,000*.15 = $39,000 in taxes on the dividend payout.

This is the second tax, a.k.a. double taxation, of dividends. From a shareholder's perspective, the effective tax rate is 35% + 15% = 50%.

Schiff then compares the cash flows:

Shareholders: $260,000 - $39,000 = $221,000
Government: $350,000 + $39,000 = $389,000

On an annual basis, shareholders get about 22% of the corporation's million dollar profit while assuming all the risk. Government takes nearly 39% while assuming no risk.

Whether this is morally right is certainly a worthy issue for debate. What is not debatable, however, is the advisability of this from an economic standpoint. Tax policy such as this discourages entrepreneurship and risk-taking. As such, productivity improvement is likely to be far less than what would be possible if risk takers were able to keep the full benefit of their action.

The drag on productivity improvement in turn serves as a drag on standard of living. Less food. More disease. Fewer houses.

In short, less wealth applicable to advancing the human condition.