This week’s “Daily Journal” guest columnist is Dr. Roy Cordato, John Locke Foundation Vice President for Research and Resident Scholar.
RALEIGH — There appears to be good news on the horizon concerning North Carolina’s corporate income tax. Both the Democratic governor and the Republican legislature seem anxious to lower the rate significantly from its current 6.9 percent, which is the highest of any state in the Southeast. Gov. Beverly Purdue has called for reducing the rate to 4.9 percent, and it is expected that the Republicans in the legislature will also propose a reduction. But cutting the rate is a halfway measure at best. The corporate income tax is a hidden, dishonest, and undemocratic tax that should be repealed.
The history of the North Carolina’s corporate tax suggests that leaving it in place will simply invite rate increases down the road when political winds have shifted. North Carolina has had a corporate income tax since 1921, and it is clear that there is no such thing as a permanent rate change. Between 1921 and 1991 the rate increased steadily from 3 percent to 7.75 percent. It was then lowered every year between 1997 and 2000, when it fell to its current rate of 6.9 percent. Theoretically, the tax is levied on all for-profit corporations doing business in the state. In reality, it is riddled with special exemptions that are meant to facilitate government manipulation of investment and business activity, usually in the name of “economic development.” Politicians have come to see the tax as a way to gain power over market outcomes.
The corporate income tax is based on the myth that corporations actually pay taxes. In fact, corporations not only do not pay taxes, they cannot pay taxes. A corporation is a legal and accounting entity. As is often pointed out, corporations can’t pay taxes, only people can. All taxes “paid” by a corporation must come out of a real person’s pocket.
The people who pay corporate income taxes are:
•shareholders, often employees participating in retirement plans, who pay through reduced dividends and capital gains;
•corporate employees, who pay in the form of lower wages;
•industry suppliers and their employees, who pay in the form of reduced demand for their products and, therefore, lower wages for their workers;
•and corporate customers, who pay in the form of higher prices.
Those who argue that corporations are “not paying their fair share of taxes” are really saying that it is shareholders, workers, and consumers who are undertaxed.
The corporate income tax is a hidden tax that adds a real but unquantifiable layer of taxation on shareholders, on workers, and on consumers. As such, it is a dishonest tax that is antithetical to the functioning of a transparent democratic process. In order to make intelligent decisions at the ballot box, the electorate needs to be aware of how much their government is costing them. Unfortunately, those who are paying the corporate tax don’t know it.
The hidden nature of corporate taxes also makes them easy to demagogue by those who simply want to raise taxes while making people think that someone else — greedy corporations — is paying. Typically, these are progressives who dislike the free-market system and want to foster an anti-capitalist mentality, while knowing full well that the corporate tax is paid in large part by the people they claim to represent — workers and consumers.
While I applaud the fact that the corporate income tax in North Carolina is likely to be reduced as part of the 2011-12 budget, this step only ameliorates the injustice created by the tax. It doesn’t make the tax any less dishonest or more transparent. As long as the corporate income tax is in place, North Carolina’s citizens will continue to be misled.