Why Libs and Cons Should All Love Milton Friedman’s Corporate Tax Proposal

I’m constantly astounded that nobody on the left or the right ever mentions Milton Friedman’s proposal for taxes on corporate profits.

On page 174 of (my edition of) Friedman’s libertarian bible Capitalism and Freedom, he proposes what seems a simple and sensible plan (transcription here):

…the abolition of the corporate income tax, … with the requirement that corporations be required to attribute their income to stockholders, and that stockholders be required to include such sums on their tax returns.

In other words, treat C-corp profits like S-Corp (pass-through) profits. Shareholders (they’re the “owners,” right?) pay taxes on them whether or not they’re distributed as dividends. Corporations would pay zero taxes on profits.

If corporations want to distribute enough in dividends to cover their shareholders’ tax bills, fine. That’s between the shareholders and the corporation.

I suggest: announce that this change will take place five or ten years hence, and let the capital markets adapt in the meantime.

Friedman doesn’t say anything about tax rates. I’d suggest taxing profits at the regular income rate or higher. (Pace the incoherent notion that taxing income from financial investments prevents people from making financial investments; what else are they gonna do with the money, stuff it in a mattress?)

Conservatives should love this proposal not only because it emanates from their godhead, but because it eliminates double taxation (profits taxed at the corporate level, then again when they’re distributed as dividends).

Liberals should love this proposal (despite its source) because it places the tax burden directly on “owners,” and it taxes corporate earnings at the same unsubsidized rate as labor earnings.

Everyone should love this proposal because it eradicates the whole public and private apparatus of corporate tax collection, and removes multiple preferential tax treatments that distort markets and keeps tax accountants, lawyers, and regulation-arbitragers burning the oil.


In and of itself, this proposal does nothing to address the international tax dodging that is such a problem with corporate profits.

There would still remain the question of capital gains and how/if they should be taxed, which I will leave to another post.

But I will mention here, once again, that the corporate interest deduction should be eradicated (along with the mortgage interest deduction). There’s no reason for taxpayers to subsidize debt financing in preference to equity financing. QTC, in fact.

Cross-posted at Angry Bear.







5 responses to “Why Libs and Cons Should All Love Milton Friedman’s Corporate Tax Proposal”

  1. Eric L Avatar

    Who cares about double taxation? I don’t see many people arguing we should reduce the number of taxes that exist and raise rates. Double taxation is usually brought up as a proxy argument when the real concern is over the overall level of taxation or who pays.

    I happen to think double taxation is a great thing. By calculating taxes in multiple ways while having lower rates for each way you do it, you make it harder to find loopholes to get around all the taxes, and there is much less to gain from dodging or lobbying for a loophole in any given tax, and that is a wonderful thing for tax efficiency.

    As a motivating example, consider the state taxes for Washington and Oregon. One has a high sales tax and no income tax. The other has a high income tax and no sales tax. So many live near the border and evade both states’ taxes. Now an approach that is fairly typical of economists looking at this sort of problem is to start from utopia: in a perfect world, what is the absolute best right way for everyone to tax? Then note that if everyone adopted that particular tax there would be no problem here. So if one of the two states is reasonably approximating the utopian tax, then they can rest assured that the freeloader problem they are dealing with is best laid at the feet of the other state and their decision to tax the wrong way.

    But there are good reasons to reject this sort of reasoning. The actual differences between the two taxes may be small compared to the distortions caused by the taxes being different. And this can easily be solved with what most states do: double taxation. Nobody can completely freeload. And the worst distortions of each tax are reduced thanks to lower rates. Is there any good reason not to prefer this?

  2. Asymptosis Avatar

    @Eric L: “Who cares about double taxation?”

    Right. But it’s an important rhetorical point because conservatives are so in a frenzy about “double taxation” of business profits. Use it.

  3. Eric L Avatar

    But I am pro-double taxation enough that I would never use that rhetorical point because I don’t want to advance the argument against double taxation. And I’m suspicious of whether the upsides of this proposal actually outweigh the harm of getting rid of double taxation.

  4. Paul P Avatar
    Paul P

    In Canada we have partial integration between corporate and personal taxes. The corporation pays taxes, because it is more efficient to tax a single corporation and because a corporate tax prevents deferral / liquidity issues that may arise by attributing income to shareholders. Personal income from dividends is “grossed up” to the pre-tax level seen by the corporation and a corresponding tax credit is given to the individual to account for corporate taxes already paid. The net effect is that the overall tax rate is pretty much the same as there would be without a corporate tax, but the CRA gets its money sooner and without the problems of attribution.