Stephen Williamson and John Cochrane have an interesting discussion of the effects of a corporate income tax. This comment by Cochrane is interesting:

So how do you deduct investment and leave something left over to tax? It rests on two ideas. First, that the tax code can distinguish “real” investments like buying forklifts from “financial” investments like buying stocks and bonds, and only deduct the former.

Second, that there is some pure “profit,” some pure “rent,” some “unreproducible input” (i.e. something that did not come from a past unmeasured investment), something like the classic “unimproved land” that can be taxed, without distorting any decision. It goes hand in hand with the complaints of greater monopoly.

But I find it hard to find and name a concrete source of profits that, once named, does not distort the decision to undertake some useful activity to make those profits. Starting, organizing, and improving a business, figuring out the intangible organizational capital that makes it a successful competitor, creating a product and a brand name, are all crucial activities for which no investment tax credit will successfully offset a large profits tax. “Intangible capital” is about all most companies have these days.

Then Gideon Magnus left this comment:

Yes with full investment expensing the tax burden as well as the expected present value of tax revenues is essentially zero, and the only reason to levy the tax is to close the loophole of people incorporating and then paying zero taxes on their labor income.

So putting this together, it seems like corporate profits involve a return on:

1. Land
2. Physical capital
3. Human capital
4. Innate talent (cleverness, etc.)

In that case, why not do the following:

1. Tax corporate income as personal income (which would effectively be the top marginal tax rate for big companies–40.8%.)

2. Allow full expensing of physical investment.

3. Do not allow interest expenses to be deducted.

4. Do not tax interest, dividends and capital gains (as part of the personal income tax).


1. You’d like to avoid taxing investment income. This system does that.

2. You’d like to tax labor income being disguised as capital income. This system does that. It also taxes land rents and the innate skills of entrepreneurs.

3. It treats debt and equity equally.

One downside is that it taxes income from investments in human capital. But in practice that’s not really much of a problem. Recall that wage taxes also tax income from investments in human capital. So the treatment is equalized between the corporate and non-corporate sectors. More importantly, the acquisition of human capital is already heavily subsidized by the government. Indeed I’m persuaded by Bryan Caplan that it’s too heavily subsidized. So if this sort of corporate tax regime slightly discourages the acquisition of human capital, it may actually improve welfare for standard “second best” reasons.

Consider how this would also simplify the taxation of personal income. For the vast majority of taxpayers, i.e. those paid wages and salaries, there would be no need to do taxes each April. The payroll and personal income tax systems could be combined into one—merely taxing wage income. For those claiming that savers are getting a tax break, just point out that they are actually paying taxes at the top rate, but at the corporate income level.

Proprietorship income would also be taxed as personal income, again with full expensing of physical investments.

What’s wrong with this idea?