Fair Corporate Income Tax

I recommend that the Congress adopt a realistic tax law—which will tax all unreasonable profits, both individual and corporate.

Franklin D. Roosevelt, State of the Union, 1944

A flat corporate income tax cannot tax unreasonable profits; rather it must either tax reasonable profits heavily or excuse unreasonable profits.

A business produces through the products of other business and on labor. It purchases capital and labor, and it applies these to create product. What expense does not flow to the workers and the suppliers instead becomes profit, itself eventually distributed to shareholders—profit held no longer counts as profit when spent later on the business’s productive operations.

The profit rate—marginal net operating profits—indicates how much a business retains per dollar of productive output. A business keeping eight cents on the dollar has an 8% profit rate; one which keeps twenty cents for every dollar spent to purchase its products has a 20% profit rate.

Consider, then, the following formula:

\begin{aligned} T(m) &= \bigg(1 – \frac{1}{ 1 + e^{2(\frac{m}{8} – 1)} }\bigg) \times R \end{aligned}

If we assume 8% is a fair rate, then a business with an 8% profit rate (m) will pay half of the top rate (R). For a 50% top rate, we get the curve below.

Various businesses and their NOP and proposed tax rate.

Businesses keeping a great deal of revenue would pay much higher taxes than those keeping only a fair profit. Those with slimmer profit margins account for a smaller portion of our economy’s taxable incomes and, being inclined to lower prices or to spend more into the economy, are afforded a lower tax rate.

While this requires updated rules to ensure businesses enjoy a tax rate befitting their average profit margins rather than simply year-to-year—it does no good to punish a business for retaining 30% profits one year and honestly investing them back into the economy and their workers over the next five years—the basic meaning does not change: a fair and reasonable tax rate for a fair and reasonable profit.