As Congress crafts yet another budget, it is time to confront a quiet enabler of America’s growing wealth gap: the way we tax corporate profits.
The U.S. corporate tax system is a maze of complexity, distortion and avoidance. At the same time, the richest Americans — who own the lion’s share of corporate stock — see their wealth balloon not from income, but from capital appreciation fueled by retained corporate earnings. They pay little or nothing in taxes until they choose to sell — if ever.
Here is a simple idea that could transform that system: Replace the corporate income tax with a flat tax on retained earnings. Instead of taxing corporate profits on paper, tax the portion that companies choose not to distribute — those retained earnings that quietly accumulate on balance sheets, inflate stock values and end up driving inequality.
The logic is straightforward. Retained earnings represent profits that aren’t reinvested in capital or returned to shareholders. They sit — often offshore and untaxed — fueling stock buybacks or simply increasing book value. Meanwhile, shareholders can borrow against those unrealized gains, grow richer by the year and legally avoid income tax altogether.
Under the current system, corporations face a 21 percent statutory income tax rate. But due to loopholes and global tax arbitrage, the effective rate is often much lower — closer to between 9 percent and 15 percent. At the same time, the top 1 percent of Americans own more than 90 percent of stocks and mutual fund wealth, much of which compounds through retained earnings without triggering taxable events.
A 20 percent flat tax on retained earnings, applied at the corporate level, would be lower than the statutory income tax but much harder to evade. It would simplify the tax code, eliminate gamesmanship and ensure that profits benefit society, whether distributed or not.
Companies could avoid the tax by issuing dividends — thereby transferring the tax burden to shareholders, who would then pay ordinary dividend taxes. Or companies could reinvest in productive capital expenditures or research and development, which could be exempted from the tax base.
People often complain that the rich don’t pay their fair share in taxes. A retained earnings tax addresses this directly, since the wealthy are by far the largest shareholders. By inducing higher dividend payouts, the tax would convert more untaxed wealth into taxable income — ensuring the rich pay more, proportionally and predictably.
This plan is fair. Wealth would no longer accumulate tax-free inside corporations. Ultra-wealthy shareholders would see more of their income flow to dividends, triggering taxes like ordinary Americans face on wages.
In 2024, S&P 500 companies earned approximately $1.9 trillion in pre-tax profits. Of that, they paid only about $248 billion in corporate taxes — just 13 percent of total profits — and distributed around $650 billion in dividends to shareholders. That left well over $1 trillion in earnings to be retained or used for stock buybacks.
A 20 percent tax on just the retained portion — estimated near $870 billion — would yield $174 billion annually. More importantly, it would encourage companies to issue more dividends — triggering personal income tax obligations at rates of 15 percent to 23.8 percent. For the first time in decades, untaxed paper wealth held by the ultra-rich would convert into real, taxable income.
This plan is transparent.Retained earnings are already reported as a line item on corporate financial statements, so no need for armies of tax accountants. This plan also encourages efficiency. Corporations would be nudged to either distribute profits or reinvest productively — reducing hoarding, stock buybacks and financial manipulation.
The scale of profit hoarding is not theoretical. As of late 2024, Apple held over $65 billion in cash and equivalents. Microsoft held more than $71 billion. Alphabet, parent company of Google, sat on over $95 billion and Amazon was at $100 billion. These figures represent retained capital sitting in balance sheets — largely untouched by taxation. In many cases, this hoarded cash fuels share repurchases or simply adds to paper valuations, thus benefiting the wealthiest shareholders while contributing nothing to public coffers.
Of course, this idea has precedents. President Franklin D. Roosevelt experimented with an undistributed profits tax in the 1930s. Today, a version survives as the Accumulated Earnings Tax, but it’s rarely enforced and easy to circumvent. This proposal is simpler, bolder and broader.
Critics may worry this plan would discourage reinvestment or burden growth. But a well-designed system can exempt reinvested earnings tied to clear capital investment or innovation. What this proposal targets is not growth but excessive hoarding of profits that serves only the wealthy few.
Others may fear that such a tax would prompt corporations to switch to alternative structures or shift operations abroad. But a retained earnings tax can be applied based on financial disclosures for U.S.-based public companies and expanded to large LLCs or partnerships. In fact, it may reduce incentives to move profits offshore, since it targets where wealth stays, not where it’s reported.
The politics are promising. A retained earnings tax is lower than the current corporate income tax — yet may raise more consistent, sustainable revenue. It eliminates the need to police every deduction, credit and carve-out. It also aligns with populist sentiments on both the left and right: no more tax-free stockpiling, no more billionaires (referred to by some today as “oligarchs”) borrowing off their gains while avoiding taxes.
Congress has a chance to reset how we think about taxing wealth — not by chasing every dollar of income, but by targeting the retained profits that silently fuel inequality and sidestep the tax system. Fixing the corporate tax code is essential not just for raising revenue but for restoring fairness, transparency and trust in the American economic compact.
Peter D. Wells is principal at Ancient Wisdom Consulting.
