Corporate #tax – why?

Why does Australia have a corporate tax rate? What does it mean to tax a legal construct that is not actually a person?

In large part, it means complexity in tax laws, regulations, numerous bureaucrats, advisors, accountants, court cases and government regulators. So much wasted time and nugatory effort. Think about the advantages in freeing those people from the daily tax grind and allowing them to do something more useful, something that would be valued by other people in society.

A corporation is merely a means of allowing investors, entrepreneurs, managers and customers to cooperate efficiently. It was the concept of the limited liability company structure, devised and refined over 200 years ago that allowed investors to participate in shares, with their liability limited to their investment. This arrangement resulted in the real growth of the corporation and with the greater investment capital supplied, the growth in living standards. Taxing a corporation merely reduces the profit distributable to investors, and hence reducing their tax liability. For a company with no international shareholders or bondholders, the ‘real’ investors, that is, people, pay tax after the corporation has firstly paid some tax. Where corporate tax rates are flat and personal income tax rates are progressive, this skews the mixture of the tax incidence. An investor paying the top marginal tax rate will probably be quite happy to have the corporation pay tax first at a lower rate – it lowers the effective tax rate the investor pays. The reverse is true for an investor with a lower tax rate. So what is the point of corporate tax? It merely rejigs the true incidence of tax among the investors.

Note that the concept of dividend imputation is an attempt to more correctly impose the incidence of taxation according to the investors marginal income tax rate. It works reasonably well. This system was introduced in Australia 30 years ago, so clearly the Government of the day recognised the illogical nature of taxing corporations. It was a step in the right direction. But how wasteful it is to set up a complicated system that attempts to get closer to the result that would be achieved by abolishing corporate tax altogether.

Then add in the complication of foreign investors, as this is sometimes raised as a reason for applying corporate taxes. But this makes no sense either. If a foreigner wants to invest in a local business, then what of it? We should welcome all sources of capital (provided company management can put that capital to good use – that ‘s another story: agency risk seems to be on the rise). If there was no corporate tax, the foreigner would not pay any tax to the Australian authorities on investment income and capital gains. Why should they? They are not drawing on any of the country’s resources either – they don’t live here, don’t use the infrastructure, they don’t gain value from the security of the police and armed services, or draw welfare payments from the taxpayer. There is no economic reason why they should pay any tax at all.

It makes no sense to pretend that corporations are actual entities that ‘must pay their fair share of tax.’ Why does the idea persist?