Replace All Federal Taxes on Income with the Fair Tax Act , HR 25

Time for a Real Change: Repeal the Corporate Income Tax

I found this article at The Heritage FoundationTime for a Real Change: Repeal the Corporate Income Tax. it was written by Dr. Karen Campbell. Dr. Campbell doesn't realize she is advocating The Fair TAx Act! Should someone from AFFT headquarters contact her to explain how The Fair Tax dovetails with her position?

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Permalink Reply by Pat Conroy on March 15, 2009 at 11:48am

It is very easy to demagogue corporate income taxes. Tax the greedy oil companies, big pharma, etc. Perhaps one place to start would be to change the language. Obama was able to do that by claiming to reduce taxes for 95% of working people. In fact, 95% of working people do not pay income taxes, but he was successful in winning the debate by changing the language.

The question is: will eliminating corporate taxes help get the FairTax passed? I think it will. If there is no corporate income tax, then only individuals will be paying income tax. We FairTax supporters already know this is true. Corporations pass all taxes through to their customers. Otherwise they couldn't make a profit and stay in business. But opponents will no longer be able to claim that the FairTax reduces taxes for big, greedy corporations because there will be no corporate income tax to reduce.

Here is one way to change the language: Instead of pushing for elimination of corporate income taxes, push for elimination of taxes on working capital. It would probably be best to start with eliminating taxes on small business working capital so that we don't find ourselves defending big oil and big pharma. Every politician pays lip service to the value of small business.

How does the current system tax small business working capital? The net income of almost every small business is presumed to be income to the owner even if the owner doesn't actually receive the profit. As such, for successful small businesses, the owner generally has to withdraw money from working capital to pay income tax. Less working capital means fewer jobs being created and small businesses account for most new jobs every year.

Here's how this works: Owner A has a small business employing 35 (including himself) with gross income of $4MM. Net income is 15% or $600,000. Owner A pays himself a salary of $100,000 per year. Normally, the income tax on a salary of $100,000 would be around $15,000 after typical deductions. Unfortunately, the IRS presumes Owner A has made $700,000 even though he did not withdraw any of the net profit for personal use. His actual tax will then be around $210,000. In order to pay the tax, he will have to withdraw $210,000 from the company's working capital account. That's enough to hire 4 or 5 additional employees.