A Policy for Corporations
Lars Poulsen - 2020-11-21
Any business larger than a dozen employees will need to be created as a
corporation of some kind. This allows it to survive over time despite
ownership changes, and it also allows a systematic way to regulate the
behaviors of large businesses.
What is a corporation?
A corporation is an entity that has some aspects of personhood, even if
it is not a person but a group of persons acting in concert and under
defined rules. You could say that it is a specialized for of an
A corporation can conduct business, buying and selling goods and
services, receiving income, paying bills and employing people.
It can own assets and take on debt. And if it has a net income, it
should pay taxes.
Most corporations are for-profit businesses, trying to earn a net income
(profit) and and distribute that profit to its owners after paying taxes
Some corporations are not-for-profit entities, serving the
community through education, culture, religious services, charitable
services or land conservancy.
These include private schools, museums, universities,
churches (and synagogues and mosques), public radio and television
stations and many other beneficial institutions.
It is notable that many of the benevolent services can also be done
as private for-profit enterprises. It has also been observed that some
non-profit organizations are controlled by the small circle of people on
their board and pay those individuals high salaries similar to what very
large businesses pay their senior managers, even when the rest of their
employees are paid little or nothing. (The American Red Cross was found
to be doing this to the dismay of the people that had donated to them.)
We have created many - often confusing - variations on the corporate
formation structures, mostly to create tax loopholes. You may look up
the definitions of C-corporations, S-corporations, Limited Liability
Companies to gain some appreciation of this complexity.
Corporations can also choose where they are registered in order to shop
around for the state that makes the fewest demands on them.
Financial institutions generally prefer to incorporate under the laws of
Delaware, because that state is quite tolerant of high interest rates
and fees charged by credit card lenders. Many small businesses with less
savory business practices like to incorporate in Nevada because that
state allows a business to keep secret who owns it.
I would like to see some changes in the corporation laws; some examples
I think it would be easier for everyone if we had fewer legal structures
to choose between. I honestly think the following should suffice:
- Partnership - all owners are employees with roughly equal ownership
and influence. Most appropriate for fairly small professional
businesses: Lawyers, doctors.
Tax treatment is pass-though, i.e. the income is allocated to
each partner and taxes as personal earned income to each.
No corporate income tax.
- S-corporation - a corporation with pass-through tax status. Most
appropriate for small businesses, with fewer than 20 employees.
- Normal corporation (C-corporation). Suitable for most sizes of
businesses. Clear distinction between the business, its owners
and its employees. Ownership can be divided in any appropriate
form, and clear partition of responsibilities.
Less Venue Shopping
I think that large, publicly traded companies should be incorporated
under a federal charter and policed by the SEC. For sure, any company
valued at or having gross revenues of a billion dollars or more should
be federally chartered.
Small businesses should be incorporated in their home state. For most small
businesses, it is perfectly obvious where they are located. Some of the
following factors may be considered:
For most businesses, most or all of these will be the same.
- in which state is the main office located
- in which state is the most revenue originating
- in which state are most employees residing
- in which state are most board members living
Corporate Income Tax
The current corporate income tax system is complicated.
Corporations pay salaries and other ordinary business expenses
that are deducted from the corporate income before tax is calculated.
Then they pay corporate income tax on a progressive scale, before
they calculate the profit that can be distributed as dividends.
When the shareholders receive the dividends, they pay personal income
tax on them, but at a reduced rate (15-20%).
This leads to many accounting manipulations to avoid paying the two
layers of tax.
I would propose to make dividends paid to US resident taxpayers a
qualified deductible business expense, but then tax them on the
receiving end as ordinary income.
Alternative Minimum Tax?
Over the years, governments have instituted may special provisions
allowing corporate tax credits for certain types of investments and
other transactions. Ostensibly, these benefit society by encouraging the
companies to do hings that benefit the public.
Some of the largest corporations have employed armies of tax lawyers and
accounts to take advantage of these provisions to such an extent that
they have managed to offset their entire corporate income tax - or even
have their federal tab bill be negative. I find this offensive and
abusive. We should eliminate these provisions, but it will take a long
time to undo all the special interest provisions buried in 20,000 pages
of tax law. As a stopgap, we might do what was done to avoid similar
abuses in the personal tax rules: Enact a minimum tax amount as a
percentage of gross revenues. Maybe 5% of gross.
Repatriation Tax Holidays
For many years, multinational corporations have been playing accounting
games to place their profits in subsidiaries in low-tax countries, often
by playing games with "transfer pricing". When a multinational
corporation such as Apple or Exxon is selling goods in Europe or India,
they can set the price that the foreign subsidiary pays for the goods
higher or lower than the real cost (or the price at which the USA
divisions buy the goods). If the set that price low, the foreign
subsidiary becomes more profitable. Then they complain to the American
legislators that the US tax rates are so punitive that they can't afford
to bring the profits home where they can be paid out to the American
shareholders. Every so often, Congress gives in and makes a special
exemption for repatriated profits for a single year. Then they bring
the money home, and pay it out as dividends and/or bonuses to managers.
This has become so commonplace that they now ONLY bring the profits home
when there is such an exemption. That is bad policy. Making dividends to
taxpaying US shareholders deductible for the corporation would be much
better for everyone.
We have seen many cases when a corporation is caught doing illegal
things, charges are brought by state or federal attorneys, and they then
case is settled for a - sometimes quite small - payment, without the
company admitting guilt.
That is offensive to me.
We have even seen companies pleading guilty to federal felony crimes,
yet no personal criminal liability attaches to their executives. (Think
That is even more offensive to me.
I would like to see criminal charges brought against the CEO and where
applicable board members of these companies. Prison time AND forfeiture
of ill-gotten profits.
Without this, getting caught breaking the law is just another business
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