Editorial NoteWe 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.