Larry Kudlow (who is currently Trump's National Economic Council director) had proposed in 2014 zero corporate income tax, arguing that

Readers know that corporate tax reform is my single-favorite pro-growth policy. Actually, I'd like to abolish the corporate income tax altogether — including all the cronyist, big-government special favors, carve-outs, deductions and exemptions. Out with all the K Street mischief.

You know who the biggest winners would be? Wage earners. That's right. Corporations don't pay taxes. They merely collect, and then pass on the tax cost in the form of lower wages and higher consumer prices.

Want to maximize wages? Forget the minimum wage and embrace corporate tax reform.

Kudlow is not the only one to argue for this. University of Maryland finance professor Albert “Pete” Kyle similarly stated in a 2017 interview:

Q. Is 20 percent the right corporate tax rate?

A. The right rate is zero. Taxing corporate profits makes aggregate economic output smaller and reduces economic growth.

Q: What’s been missing, misleading or overlooked in the corporate tax debate?

A. The debate about the corporate tax rate overlooks the fact that it is economically inefficient to tax capital by double taxing corporate profits. This motivates corporations to use too much debt financing, to move capital intensive operations overseas, and to hire lawyers and accountants to avoid taxes rather than hire professionals who can do something more socially productive with their skills.

The correct way to tax income, whether from capital or labor, is to tax the consumption that results on a one-time basis, when the consumption takes place. This can be done by eliminating the corporate profits entirely, replacing it with something similar to a value-added tax, with a payroll tax and Roth IRAs, or by allowing unlimited contributions to and withdrawals from 401-k accounts. The income is taxed once when it is withdrawn from the 401-k account and consumed.

I don't follow closely Kudlow's writings, so he may have even changed his opinion on that, but since zero corporate income tax is uncommon (worldwide--I think only some "fiscal paradises" managed to keep it zero long-term) what are some potential problems (political, economical) with this zero approach to corporate taxation?


3 Answers 3



The problem is an elementary one which explains why the corporate income tax was created.

If you can have a 0% income tax rate in undistributed corporate income, but shareholders must pay a non-zero income tax rate on corporate income distributed as dividends, then there is a strong incentive for corporations to indefinitely retain all income deferring taxation of that income forever.

The alternative that avoids that and allows for a 0% corporate tax rate is to have a pass through regime, as S-corporations do, which immediately taxes corporate income at the individual level without regard to whether or not distributions are made by the corporation. But, that is exceedingly hard to administer for a publicly held corporation in which any given share may be transferred many times during the course of a tax year.

Retaining all income doesn't prevent shareholders from cashing out their shares by selling them even in the absence of dividends. But, it does mean that income from corporations that make profits won't be allocated as readily to other businesses which could use those funds more profitably, as they would be if dividends were paid.

They merely collect, and then pass on the tax cost in the form of lower wages and higher consumer prices.

This hypothesis about the incidence of corporate taxation is almost completely wrong as has been illustrated by the way that corporations acted in response to the cut in corporate tax rates that took effect in 2018. Almost all of the benefit of that corporate tax rate cut has been passed on to shareholders.

The observed behavior makes lots of sense. Corporations have an interest in being profitable and negotiate the profit maximizing consumer prices and employee wages. A tax on part of those profits doesn't change the incentive to behave in the same way.

The belief that a "consumption tax" is superior to a tax on "income" also isn't well supported, in part, because it systemically disfavors human capital over other forms of capital investment, and human capital is an increasingly important factor of production in our economy which is overlooked in most traditional macro-economic models. Also, macro-economic models are notoriously inaccurate (unlike micro-economic models which are quite reliable and provide useful predictions).

Double taxation of corporate profits is an issue and doesn't make lots of sense. The tax rate of income should not depend significantly upon the form of entity used to earn it.

You eliminate double taxation of corporation income, however, not by reducing corporate tax rates to zero which has predictable negative problems, but instead by either treating corporate income taxes as a withholding tax against future dividends (lowering the effective tax rate on dividends), or more crudely, by providing corporations with a deduction against corporate taxable income for dividends paid (which isn't as perfect an offset but has the virtue that it works better in a federal system like that of the U.S. than a dividend withholding tax system).

  • "then there is a strong incentive for corporations to indefinitely retain all income deferring taxation of that income forever". The existence of fiscal paradises and subsidiary corporate tax provisions kinda has that effect anyway, except that money is kept off-shore. money.cnn.com/2017/11/03/news/companies/… Commented Jul 16, 2018 at 21:11
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    @Fizz Loopholes undermine the U.S. income tax system, no doubt, but not yet severely enough to make it totally dysfunctional. An alternative new source of revenue that has been suggested is to impose a low percentage tax on publicly held securities market valuation outstanding.
    – ohwilleke
    Commented Jul 16, 2018 at 21:12
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    @lazarusL (1) It reduces overall tax collections, (2) it favors profitable but mediocre firms over very profitable firms denying them capital since retained earnings are locked in, (3) it makes stock prices more volatile since the link between FMV and corporate shares is more attunated than in companies with regular dividends that provide a reality check, (4) it makes corporate stock investment far more tax favored than, for example, purchasing capital equipment and investing in higher education and skill development.
    – ohwilleke
    Commented Jul 17, 2018 at 17:31
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    @ohwilleke but why as an investor do I want a mediocre firm to invest in itself for a stock value increase (and a low one relative to the rest of the market if this really is a distortion) that I have to pay taxes on eventually vs a dividend that I also have to pay taxes on?
    – lazarusL
    Commented Jul 17, 2018 at 17:36
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    Do you have any sources that discuss your two proposed solutions? I'd like to read more into that
    – Gramatik
    Commented Jul 17, 2018 at 21:15

I found a simple but interesting argument from two economists (Eric Toder and Alan Viard) who have changed their opinion on this (from 0% they proposed in 2014 to 15% in their 2016 proposal), namely that the corporate tax is the main tax on foreign investors:

The disincentive for foreigners to invest in the United States could be completely removed by eliminating the corporate income tax… That would be the optimal policy if the United States were a small economy, with no unique attributes, that provided rents to foreign investors. In that case, the United States would not be able to raise any revenue from foreign investors by imposing a tax on them, as the investors could completely shift the tax to American workers by demanding a higher pretax return. Because the United States has unique attributes as an investment location, however, investors do not regard equity investments in the United States as perfect substitutes for investment in other countries. As a result, foreign investors in US equity cannot fully shift the tax to Americans. It is therefore in the United States’ national interest to impose a low-rate tax on these foreign investors to extract some rents from them. We believe that 15 percent is a reasonable tax rate to achieve this goal.

I'm guessing there are some assumptions underlying this such as most foreign investment being from corporations that establish US subsidiaries, or something like that.

Anyway, the non-zero tax logic for foreign investments (mainly in the form of corporate income tax) is reflected in a OECD analysis:

For policy-makers and academic researchers alike, accurate estimates of the FDI [foreign direct investment] response to host country taxation are difficult to make, given the need to consider jointly tax and non-tax factors in different locations, and the prospect that the tax elasticity of FDI may vary considerably across business activities, host countries and time. Indeed, a complicating factor is that the possible impact of host country tax on FDI will differ across countries with varying host country characteristics (non-tax factors).

[...] a number of large OECD countries with relatively high effective tax rates are very successful in attracting FDI. This suggests the importance of market size in attracting FDI and the presence of location-specific profits that governments are able to tax.

Furthermore, that OECD analysis gives us a simple 2nd argument: the US can set its corporate tax rates taking into account that of other economies reasonably similar (e.g. Western Europe, as a whole):

Increased attention is being given by countries to “tax competition” for inbound FDI, linked to the increasing mobility of capital and pressures to offer a competitive tax system. [...] To begin, host country tax comparisons tend to be made with similarly situated countries, in terms of location and market size.

So tax competition works both ways... until enough of the advanced economies lower theirs to zero, it's not terribly advantageous for any particular country in this group to do so. The same line of thinking probably goes for fiscal paradises (except they already hit zero) because the latter compete in their own league, probably not having much to offer besides some banking infrastructure.


A problem means some interference with some person, or group of person's, goals. In the case of income tax, it is very difficult to claim that it has something to do with morality or ethics or any such thing. It's only what some political entity or group thinks should happen with regard to corporations.

The purpose of a system is what it does. https://en.wikipedia.org/wiki/The_purpose_of_a_system_is_what_it_does

If a system has been around for many years, and many people have had opportunity to change it, but the system has not changed, then the implication is that they don't find changing it worth the effort. The difference between what they want, and what is actually happening, is too small for them to make the effort to change the system.

Income tax collects revenue. Yes. But it does many other things. For example, if a given action allows a corporation to decrease taxes paid, then income tax law is a way to push corporations to do that thing. So, if some kind of research is officially tax deductable, then that activity gets encouraged. What is the result? Well, sometimes it is arguable that the research is valuable to somebody. Whether it's valuable to the company is often quite a challenge to demonstrate. But sometimes the research is difficult to determine as valuable to anybody. For example, what is the value of research that involves coating polar bears in oil?


Income tax laws provide a huge lever that allows various government entities to push corporations in ways that corporations find hard to resist. And so, resist they do not. Instead, they become lobbyists.


And generally speaking, a big company can make few better investments than buying a member of Congress.



So, a big problem would be for the government members themselves. They would lose a huge part of their ability to push levers. They would still have regulation to screw with. But that's only one side of the issue. With income tax laws to diddle with, they can offer rewards to the companies that offer the biggest benefit to the politicians.

And oh how the money rolls in.


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