TAXING BUSINESS

 

{April, 1985, Adview Magazine}

 

It has frequently been urged that business should bear a larger share of the income tax burden. It was reported recently that individuals are now bearing a larger share of the North Carolina income tax burden than ever. Should business pay more?

 

The discussion of business taxes generally revolves around the taxes paid by corporations. Since an individual is the owner of his own business if he is a sole proprietor, it is clear that he will pay taxes as an individual on the profit made from his business. It is equally clear that partners in a business enterprise ultimately pay taxes as individuals. But corporations are different. Or are they?

 

From a legal standpoint, we as individuals are "natural persons" while corporations are "artificial persons." Corporations are human creations. But once created, they engage in many of the activities engaged in by humans, including the activity of making money.

 

Since corporations engage in business in much the same way as natural persons, shouldn't they be taxed to at least the same extent as natural persons? No. Indeed, it is unfair to impose any tax at all on corporate profits.

 

Corporations are owned by individuals known as shareholders.  When a corporation makes a profit, it must first pay a tax at a rate fixed by the government.   It then pays the remaining profit to its shareholders in the form of dividends. The shareholders then pay income taxes on their dividends. Why should the corporation pay a separate tax on its profit and then pay the remainder to its owners to be taxed again?

 

A small corporation can elect to be taxed as a "Subchapter S" corporation and can, thereby, "pass through" all profits to its individual owners, thus avoiding the double tax. But there are many reasons why it is not practical to organize a corporation in this way. And, in any event, the whole notion of this kind of corporation was conceived to lessen the impact of the corporate income tax. The question is: Why do we have it at all?

 

I suspect that the corporate income tax has survived because it is easy to impose a tax upon such an abstract entity as a corporation. The very word "corporation" calls up in our minds images of some kind of monster that preys upon the weak and helpless ordinary human being. The word "business" is almost as bad. And, for some reason, "making a profit" sounds worse than "having an income." Nobody can object to imposing taxes on profits made by monsters.

 

We should not forget that, ultimately, you and I are the monsters. All farmers are in business, and many are incorporated. Many of us own stock in corporations. Even if we do not own stock, we may own shares in a mutual fund that invests in stocks for us. Or we may own life insurance policies that depend upon stock investments to help generate cash surrender value. Or we may have a pension plan that invests in stocks. The corporate income tax directly affects many of us. But even if it did not, it would still be unfair.

 

Corporations are required to pay a franchise tax annually just for the right to continue existing. The corporate income tax just makes matters worse for the individuals who own corporations by imposing a double tax upon their income. And it makes matters worse for all of us by providing our government one more opportunity to tax us as individuals without our really knowing it.

 

 

   -Contact Me-

 

 

We all see things in different ways. Help me to see things your way. I welcome  your questions and comments.   

 

    --- Jesse Shearin

 

 

 

 

P O Box 641
1609 Church Street
Scotland Neck, NC 27874

 

Telephone: 252-826-3767

 

Email:

jesse@jesseshearin.com