Our Colleagues Respond …

As you may recall, on December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? And then, on December 20th, we published responses by our colleagues Andrew Felo of Nova Southeastern University and Wm. Dennis Huber of Capella University.

But we still are not yet ready to bring our taxation policy conversation to a close! Lawrence Murphy Smith of Texas A&M in Corpus Christi recently responded:

Corporate earnings are taxed like people, as the people who own the corporation (i.e. stockholders) receive dividends or capital gains from selling stock. For that reason, I've always thought the corporate income tax should be zero, thereby avoiding double taxation at the corporate and then the individual level. Further, as you may be aware, the U.S. corporate income tax rate is currently second only to Japan. You might find my paper on taxes and economic activity of interest.

He elaborated:

My point is that corporate income shouldn't be taxed at all. In other words, if the corporate income tax rate is zero, that would not mean corporate income avoids tax. The people who own the corporation would pay taxes on all the corporate earnings, either when they receive dividends or when they sell the stock. Thus, corporations need have no income tax imposed on the corporation itself, as the owners/people/stockholders ultimately pay taxes on whatever the corporation earns.

As shown in my paper, the US corporate income tax rate is currently second highest in the world, not to mention the most complex, creating high compliance costs. Lowering or eliminating the US corporate income tax would be a boon to the economy.

These are interesting questions, aren’t they? They certainly carry broad public interest ramifications.

We thank Murphy for responding to our recent posts with his astute comments. We continue to welcome, and we shall continue to publish, our colleagues’ perspectives regarding the system of taxation in the United States.

If You Sense That You Need A Different Approach, Why Not ExploreAlternative Accounting Practices?

One of the strengths of mainstream accounting research is its standardized regularity. We define our exogenous and endogenous variables based on prior research studies. Then we develop our experimental hypotheses. And after drawing a sizable sample from our clearly defined population of transactions, we use large-scale statistical methods to test those hypotheses.

But what if the variables aren’t easily defined? Or the population, for that matter? Or what if a sizable sample cannot be extracted and quantitatively tested at a meaningful level of significance?

In other words, what if you sense that you need a different approach? How should you proceed? Under such circumstances, you may wish to explore alternative accounting research practices.

For instance, let’s say that you’re evaluating the anti-theft preventive controls at the card, dice, and roulette tables of a casino. How can an auditor test those controls while the games are in progress on a floor that never closes?

The best approach for testing whether controls are in place to prevent dealers from stealing chips may be to employ the auditing method of focused observation. And to make the system more “auditable,” the casino may choose to keep all of the stacks of chips in plain sight.

Indeed, the “plain sight” tactic may convey an additional benefit by deputizing gamblers to serve as auditors. In other words, by enhancing the visibility and thus the “auditability” of the preventive controls regarding chip theft, the casino can enable the players to form a transitory social community to observe and police the dealers.

Likewise, according to Ingrid Jeacle’s 2017 Accounting, Auditing & Accountability article entitled Constructing audit society in the virtual world: the case of the online reviewer, the reviewers of online services like Amazon have formed virtual communities that feature audit logics. Ingrid utilizes a new research methodology entitled “netnography” as a means of “… becoming familiar with the operational features of the site and analyzing its textual discourse.”

It’s not a traditional method of accounting research, is it? But its alternative approach is necessary for studying emerging communities in virtual online spaces.

Caroline Lambert, the Chair of the Conference Organizing Committee of the May 2018 Alternative Accounts Conference at HEC Montreal, also utilizes alternative accounting practices when necessary. According to Caroline:

Alternative Accounting is both an approach and a state of mind. It’s a way to look at events and characteristics with different lenses. It requires us to re-think our assumptions about the influences of accounting in our daily lives, encompassing the largest meaning possible.

For instance, together with Claire Dambrin, in an article entitled Beauty or not beauty: Making up the producer of popular culture that was published in Management Accounting Research in 2017, we analyzed the control mechanisms -- mostly cultural controls -- through which brand managers embody their product. The managers must continuously brand themselves within their own organizations to be considered “performing individuals.”

Alternative accounting is an interesting approach, isn’t it? Clearly, it is needed to study cultural, sociological, and other topics when traditional approaches fail to offer practical research methods. And given the prevalence of such topics in the Public Interest field, it’s the type of research approach that is sure to attract our colleagues.

Our Colleagues Respond …

On December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? You can find that piece, and all of our other blog posts, on our blog page at AAAPublicInterest.org.

But Michael’s post did not bring an end to our taxation policy conversation! Two of our colleagues then responded with follow-up comments.

First Andrew Felo of Nova Southeastern University noted that “individual owners of the corporation also pay income tax on the corporation’s earnings. That means the income is taxed at a much higher rate than 20%.”

Why is that important? Because it addresses the concern that the corporate tax rate is about to be reduced to a level that is far less than the individual tax rate. Nevertheless, the two-tiered nature of our system of corporate taxation does illustrate Michael’s original observation that “corporations aren’t taxed like people.”

And then Wm. Dennis Huber of Capella University suggested that: “To see how the Supreme Court has created corporations as persons, see Law, Language, and Corporatehood: Corporations and the U.S. Constitution, and The Supreme Court’s Subversion of the Constitutional Process and the Creation of Persons ex nihilo.” Both are available at Dennis’ SSRN page.

We thank Andrew and Dennis for responding to our recent post with these insightful comments. And we shall continue to publish our colleagues’ perspectives regarding the American system of taxation.

If Corporations Are People, Why Aren’t They Taxed Like People?

Editorial Note

We are delighted to publish this “opinion piece” by Dr. Michael Kraten, a member of the AAA Public Interest Section and a frequent contributor to our social media blog. As always, when you read this contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Author Biography

Michael Kraten, PhD, CPA (Mike) is an Associate Professor of Accounting at Providence College, where he teaches the graduate accounting capstone course and an interdisciplinary undergraduate course in sustainability. He serves as the publisher and editor of the AAA Public Interest Section's social media blog.

Mike specializes in valuation, risk management, and management accounting issues, with functional interests in sustainability and corporate social responsibility. He has written papers for Accounting and the Public Interest, the Journal of Banking and Finance, the International Journal of Accounting, the CPA Journal, and other publications.

Opinion

Have you been keeping track of the U.S. Republican Party’s proposal to transform the American system of income taxation as it wends its way through the legislative process? If you’re doing so, you may be wondering about the answer to a very simple question:

If the Republican Party truly believes that “corporations are people,” why is it willing to tax corporations at rates that fall so far below comparable personal (or individual) rates?

After all, if corporations are people, one may conclude that they should be taxed like people. Conversely, if they are not, then one may conclude that several recent Republican legislative positions are dissonant in nature.

To elaborate on this question, it may be helpful to review some historical background. And to do so, we may wish to begin with the birth of the American nation in 1776.

In June 1776, for instance, Virginia ratified its Declaration of Rights, a document that later evolved into its State Constitution. The declaration included an assertion that “… all men … have certain inherent rights … namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.”

The Declaration clearly drew upon John Locke’s earlier assertion, in his Two Treatises of Government, of an individual’s natural rights to life, liberty, and estate (or property). And at roughly the same time that the colony of Virginia was ratifying its Declaration of Rights, Virginian Thomas Jefferson was defining life, liberty, and the pursuit of happiness as unalienable rights in the American Declaration of Independence.

But did Locke, Jefferson, and their peers intend to imply that business organizations also possess these unalienable rights? Or were they strictly referring to rights that are held by individuals?

Their writings appear to be focused on individual rights. Nevertheless, the U.S. Republican Party now supports the libertarian position that corporations are associations of individuals. Thus, consistent with recent U.S. Supreme Court decisions, certain human rights that are held by individuals can be aggregated into rights that are held by associations of individuals, and thus by corporations.

That’s why, during the 2012 Presidential campaign, candidate Mitt Romney declared that “corporations are people” in regards to the legal rights of corporations. Despite subsequent public criticism of Romney’s declaration, he was accurately describing the Supreme Court’s position in various decisions (such as the Citizens United and Hobby Lobby cases) that confirmed the existence of corporate rights.

In a fiscal sense, President Ronald Reagan’s earlier Tax Reform Act of 1986 also established a rough equivalence between corporations and individuals by bringing the maximum corporate tax rate and the maximum personal rate into rough equality. Specifically, it reduced the nominal corporate rate to 34% and the nominal personal rate to 28%. However, due to the phase-out of personal exemptions, it “topped out” the effective personal rate at 33%.

So how can we summarize these established (or “establishment”) Republican positions? Although the Founding Fathers and their predecessors defined individual rights without explicit reference to corporate rights, U.S. Republican Party leaders from Ronald Reagan to Mitt Romney implicitly or explicitly declared that “corporations are people,” and concluded that business entities should enjoy many of these same rights.

But then what are we to make of the fact that President Donald Trump favors a reduction in the top corporate tax rate to 15.0%? While only supporting a slight reduction in the top individual rate to 35.0% from 39.6%?

That’s a bit inconsistent with the established Republican position, isn’t it? After all, if business corporations possess many of the natural rights of individuals, it is reasonable to believe that they should be taxed as individuals. Instead, the President favors an ostensibly dissonant policy of treating corporations like people on legal matters when it favors business entities to do so, while treating them differently than people on tax matters when it likewise favors the entities to do so.

On the one hand, there may be nothing illegal about such a position. But on the other hand, its natural dissonance may breed a sense of cynicism about a lack of equity in our system of government.