[An] important issue in business tax reform is whether we ought to tax corporations in the first place.
Taxing corporate income is a convenient and popular means of collecting revenue. The unfortunate side effects of the tax, however, have led economists to question its value. By lowering the net return on investment, the tax may reduce expenditures for plant and equipment, and thereby stow economic growth.
The corporate in come tax, moreover, gives businesses a powerful incentive to raise their capital by borrowing, rather than by selling new stock. Interest payments on bonds are counted as a business expense, and taxed only as personal income for the recipient. By contrast, regular corporate income is taxed twice—once, when the money is earned by the corporation, then again as personal in come, when it is paid out as dividends.
Such arbitrary advantage favors one class of Investors (bondholders) over another (stockholders), and one kind of enterprise (unincorporated partnerships) over another (corporations). More importantly, the incentive tempts corporations to go deeply into debt to reduce tax liability, thus in creasing their financial vulnerability in lean times...
Everyone would like to eliminate the bias in favor of debt capital and increase investment without sacrificing government revenue.
We favor the most straightforward war outright abolition of the corporate income tax—what is known in tax jargon as “full integration.” After abolition, corporations would continue to transmit funds to the Treasury. But these payments would serve as withholding against the personal income tax liability of individual stockholders...
A good tax system raises revenue with minimal impact on the behavior of individuals or businesses. The corporate Income tax has no place in such a system.