As Congress works on another budget, it’s crucial to confront a significant factor behind the widening wealth gap in America: the taxation of corporate profits.
The U.S. corporate tax system is a tangled web filled with complexities and loopholes. Meanwhile, the wealthiest individuals, who predominantly own corporate stocks, benefit from capital gains rather than income, accumulating wealth through rising corporate profits without paying much tax until they sell their shares.
One straightforward idea could create real change: replace corporate income tax with a fixed tax on retained profits. This approach would focus on taxing the profits that companies decide not to distribute, which typically linger on balance sheets, inflate asset values, and foster revenue that fuels inequality.
The reasoning is pretty clear. Retained earnings represent profits that haven’t been reinvested in business development or distributed to shareholders. These funds often sit offshore, encouraging stock buybacks rather than being utilized to benefit the economy. Shareholders can even borrow against these unrealized profits, increasing their wealth year after year while dodging income taxes.
Currently, businesses have a statutory income tax rate of 21%, but thanks to various loopholes and global tax strategies, the effective rate can dip as low as 9% to 15%. Meanwhile, the wealthiest 1% of Americans hold a strikingly disproportionate share—over 90%—of stock and mutual fund wealth, all while accumulating untaxed revenue.
Implementing a fixed tax of 20% on retained earnings would be lower than the current corporate income tax rate and much simpler to navigate. This would streamline tax laws, eliminate gaming the system, and ensure that profits are contributing to societal welfare, regardless of whether they are distributed or not.
Companies currently avoid taxes by paying dividends, transferring the tax load onto shareholders, who then pay the regular dividend tax. Alternatively, businesses can reinvest their profits in productive endeavors or research and development, which may qualify for tax exemptions.
People often express frustration over the rich not paying their fair share. This proposed tax directly addresses that, as the wealthiest individuals are usually the largest shareholders. By encouraging higher dividends, this plan could shift more tax-free wealth into taxable income.
This approach seems fair. It ensures that wealth doesn’t accumulate without taxation within companies. Wealthy shareholders would face more income flowing from dividends, similar to how ordinary Americans are taxed on their wages.
In 2024, S&P 500 companies reported around $1.9 trillion in pre-tax profits, paying only about $248 billion in corporate taxes—just 13% of their total profits. They also engaged in stock buybacks or generated more than $1 trillion in revenue.
A 20% tax on the retained portion, which is estimated to be around $870 billion, could generate $174 billion annually. More importantly, this would incentivize businesses to pay more dividends, leading to personal income tax obligations that range from 15% to 23.8%. For the first time in decades, unrealized gains held by ultra-rich individuals would transform into actual taxable income.
This plan is also transparent. Retained earnings are already listed in a company’s financial statements, so extensive accounting resources wouldn’t be necessary. Additionally, it encourages companies to distribute profits productively instead of hoarding cash or buying back stocks.
Profit measurement is not just theoretical. For instance, as of mid-2024, companies like Apple were holding over $65 billion in cash, Microsoft over $71 billion, and Alphabet, Google’s parent company, around $95 billion. Amazon wasn’t far behind with $100 billion. This retained capital usually benefits only the wealthiest shareholders while contributing little to public finances.
There’s historical precedent for this concept. President Franklin D. Roosevelt introduced a tax on undistributed profits in the 1930s. Although a version of it still exists today, it’s seldom enforced and easily avoided. This new proposal would be simpler, bolder, and broader.
Critics might argue that this approach could discourage reinvestment and hinder growth. However, a well-structured system could exempt reinvested income directly tied to essential capital investments and innovation, aiming to focus on profits that only benefit a select few.
Others might fear that such taxes would push companies to change their structure or operate internationally. However, based on financial disclosures from U.S.-based public companies, this tax could apply to larger LLCs and partnerships, potentially reducing the incentive to move profits offshore since it targets the location of wealth retention instead of just profit reporting.
The political landscape looks promising. Revenue taxes would be lower than current corporate income tax rates, possibly generating more reliable and sustainable revenue. This method eliminates the need to monitor complex deductions and credits, resonating with populist sentiments across the political spectrum. No more tax-free hoarding of wealth.
Rather than chasing every dollar of income, Congress has the chance to rethink how to tax wealth, zeroing in on the prolonged profits that evade taxation. Adjusting corporate tax codes is essential not just for raising revenue, but for restoring fairness, transparency, and trust in the American economic system.
