Reply #76: because businesses can hold cash

[Kurt_and_Hunter]

If a corporation liquidated everything each year and divvied it up to all the shareholders your comments would be spot on. The corporate profits would be realized as individual income each year and taxed that way.

In the instance where a corporation does pay out profit money to shareholders (dividends) there was a controversy along the lines of what you describe--that the money was being taxed twice. I am sympathetic to that argument, but not the way they resolved it. (They made dividends low-tax for the recipient instead of the more sensible step of making them fully deductible for the corporation. Since corporations often pay no taxes the right side to tax was the individual as straight income, not any kind of capital gain. IMO.)

But only a small amount of corporate profit is distributed to individuals in practice. A corporation can just bank all that money, and they often do. And people buy the company stock because they know the company is sitting on 100 billion dollars. The company has no motive to disburse that cash because their stock is doing fine with no or small dividend.

And that money can sit there for a generation without ever being taxed until it someday, somehow turns into individual income.

That's why we tax corporate profits. Because otherwise corporations would become like hedge funds or something... immense tax havens for capital.

(One quarter during the internet boom Microsoft posted a big profit that was surprising for such a settled corporation. But it turned out that more than half of that huge quarter was profits from the increases in Microsofts stock holdings in other computer companies that were more caught up in the internet boom. Microsoft, a manufacturer, had become a defacto small-cap internet stock fund.)

I don't know that that is all of the reason, but it is some of it.