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NC Senate Makes Bold Move On Tax Reform

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This week the NC Senate, led by President Pro Tem Phil Berger, took a bold move towards cleaning up state government. Senators voted overwhelmingly to get rid of the corporate income tax, one of the nastiest parts of the state tax code. The supporters of the status quo (which is not working, as our economy clearly attests) are going to have hissy fits.

Those who profit from misleading the public are going to be on the attack. This fight should provide some real insight into who is really attempting to serve the public and who is cashing in on insider deals.

It is easy to see why greedy crony capitalists support a high corporate income tax. Legislators can reward their strongest supporters with special tax breaks. The higher the overall rate, the greater the rewards for cutting special deals out of public view. High corporate rates are not just a sign of bad government; they encourage and enable bad government. That’s one reason well run businesses view high corporate rates as a major negative when considering business locations. (The other obvious reason is that the higher the tax rate, the harder it is to break even, much less make a profit. And even people who don’t know much about business know that a business that keeps losing money instead of making money eventually runs out of money and closes. )

But it is truly a mystery why people who claim to be Progressives call for a corporate tax, when the real effect is to lower wages, reduce job creation, and to tax the truly poor on income that would otherwise not be taxable. Are the “Progressives” who support corporate income taxes really crony capitalists in disguise, or are they just as confused by the nonsense the media spouts about economics as most other citizens?

If you really want honest government, an essential first step is the elimination of one of the greatest enablers of bad government. Besides, corporate taxes reduce employee income and tax less well to do investors at the same rate as the wealthiest investors. Here are the easily verifiable facts:

While corporations are legal entities, most intelligent adults (as well as many not so intelligent adults) realize that they are not real people. They don’t go out and party. They can’t eat, drink and make merry. They’re just a stack of papers that allows real people to pool their funds to make investments.

A lot of those invested funds come from very ordinary, not very wealthy, individuals who have managed to save a little money in pension funds, college savings plans, or mutual funds. While the poor and middle class don’t have as much to invest as the seriously wealthy, there are a heck of a lot more people in the 99% than the 1% (try arguing that one) and what they earn on their savings is probably even more significant to them than those with sufficient wealth to live on for the rest of their lives.

Once a group of people, regardless of wealth or income level, puts their money together to form a corporation, that money and all the other money the corporation earns will only leave the corporation legally in one of three ways – to buy goods and services, to pay employees, or as a distribution to the investors who formed the corporation.

Purchasing goods and services is simply a cost of doing business. Paying employees is usually considered a good thing, and the employees are taxed on the income they receive. And when corporate earnings are distributed to the owners, they are taxed based on the tax bracket of the recipient. In other words, those so poor they don’t pay taxes don’t pay taxes on the distribution and those who have higher income pay at whatever tax rate is required at their particular income level.

Absent a corporate income tax, all funds coming into the company go out in one of the three ways mentioned. When the company makes a distribution to its owners, they are taxed on what they receive. And why should the owners be taxed before they receive any funds? Because the government wants their cut as soon as possible, or because imposing a tax at the corporate level lets the government tax people so poor that it would be embarrassing to try to tax them at the individual level?

For example, North Carolina has billions of dollars invested in state pension funds that retirees count on for retirement income. The returns on those investments are closely monitored and those returns include dividends on stock. North Carolina doesn’t directly tax its state pension funds; it taxes retirees when they receive pension payments at varying rates depending on their particular income level and employment agreement. Yet by taxing corporations, NC manages to transfer funds that would otherwise be available to pension recipients into accounts that can be spent on whatever the legislature decides without those recipients even realizing what is happening. And the corporate tax rate reducing the funds available for pension payments is the same for all pension recipients, regardless of contract agreement or income level.

Corporate taxes are merely a way for government to take more funds from all citizens without the citizens realizing they are being taxed, and for politicians to impose taxes on the poor while claiming they’re targeting the wealthy.

To repeat, taxing corporate shareholders on income at the corporate level imposes the same tax rate on poor shareholders as wealthy shareholders. Taxing the income when distributed actually yields a more progressive result.

And as for the funds not distributed, it is fairly obvious that if the tax were not imposed at the corporate level, the business would have more money to invest in goods and services and employee labor to make more money. Obviously, those additional funds would be spent in one of three ways – [see above]

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