What do Milton Friedman, the late Conservative economist, and Robert B. Reich, a Liberal economist who served in the Clinton administration and who is an advisor to President-elect Obama have in common?Â They both propose that business taxes be eliminated.
That the same proposal is advanced 45 years apart by two economists of otherwise contradictory philosophies confirms that at least its founding postulate is rooted in immutable principles.
Politicians ought to listen this time.Â We are all too familiar with the conditions vitiating our economy and our futureâ€”the banking crisis now well into its eighth month, bailout after bailout, rising unemployment, danger of deflation, a weak dollar, poor world competitive stature, and a capitulation of gains in our personal investments earned in the last 10 years.
More than any other proposal, more than stimulus packages, more than personal tax cuts, more than bailouts, the Friedman-Reich proposal will almost immediately reverse these conditions and restore the economy to health.
Why should business taxes be zero?Â Because we have in our country today a system of â€œdouble taxationâ€, meaning that every dollar that certain corporations make is taxed twice.Â These are the corporations likely to be in your 401(k), IRA, 529, or other portfolio.Â For example, you work for Starbucks and have some of your personal savings in their stock.Â For every $100 Starbucks makes in profit, they pay $35 in taxes leaving $65 to be distributed to shareholders in dividend or capital gains.Â Some economists argue that $35 comes in higher product prices or lower wages.Â When you are paid dividend you are taxed again at your individual rate, or when you sell your stock you are taxed another 15% (currently) or $9.75 on the profit.Â Â You, as a shareholder, are left with $55.25 in that $100 earned by your company less dividend taxes paid.
With a single taxation system, only the owners of the company, the shareholders, pay the tax on profits at their normal tax rate. If you pay taxes at the marginal rate of 25%, then your share of that $100 is $75 ($100 – $25). You [or your 401(k), IRA, and other investments] keep more of the business profits, which you will spend, save, or invest again in the economy.
Nobel prize winning economist Milton Friedman first recognized the inequity in double taxation in his book Capitalism and Freedom (The University of Chicago Press, 1962) and wrote about it in Free To Choose (Harcourt, 1990).Â He wrote,
â€œThe corporate income tax, too, is highly defective.Â It is a hidden tax that the public pays in the prices it pays for goods and services without realizing it. It constitutes double taxation of corporate incomeâ€”once to the corporation, once to the shareholder when the income is distributed.Â It penalizes capital investment and thereby hinders growth in productivity.Â It should be abolished.â€
And recently in his book, Supercapitalism (Random House, 2007), Robert Reich came to the same conclusion:
â€œIn reality, the corporate income tax is paidâ€”indirectlyâ€”by the companyâ€™s consumers, shareholders, and employees.â€, and concludes that â€œAbolishing the corporate income tax would â€¦ help capital markets work better.â€
Reich extends his analysis and observes because corporations are not people they should not be afforded the opportunity to challenge laws in courts, nor to lobby government, and should be denied other rights and privileges reserved for citizens.Â Subsidizing corporations would be unnecessary without a corporate tax.Â And in this age of bailout-mania, eliminating the business tax would reduce or obviate the need for Washington to rescue companies with taxpayer money.
By ending double taxation, we will create an environment of capital formation, and with it business growth without the need for stimulus, bailout, subsidy, tax credit, tax deduction, tax loophole, or other gimmicks. We believe this is the way we can make our economy strongâ€”permanently strongâ€”and competitive, without deficits, Federal borrowing, and increased taxation.
Friedman-Reich will make unnecessary:
- stimulus packages
- tax loopholes
- government subsidies
- capital gains taxes
- corporate lobbying
- attract capital to business
- make companies more competitive in the world economy
- halt layoffs and increase employment
- keep jobs here
- increase the value of retirement and other savings accounts
- make capital markets more efficient and relieve the credit choke
- ultimately increase government tax revenue
There is no better time to consider this proposal. Â We have an economy that needs revitalization, a new President who has called for bi-partisan ideas, and a breakthrough concept with support from both sides of the political spectrum.Â This is an idea started by a conservative and advanced by liberals.Â And Mr. Reich is an advisor to President-elect Obama.Â We believe we have therefore, at this moment, the perfect storm to advance a proposal that would redress systemic disadvantages our tax system imposes on businesses and capital markets, precisely at the time when both need help.
Please sign the Friedman-Reich petition.Â We hope to present the petition to the new Obama administration and to Congress.