Today in liberal self-abuse
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Hammer time

Hammer time

There’s a bit of a boomlet in counter-intuitive liberal assaults on the corporate income tax.

Bob Reich, amplified by Markos on Daily Kos, suggests we ditch the CIT and increase other taxes we like (on capital gains or stock transactions). My friend and brother from another mother Dean Baker has a baffling column on how eliminating the CIT would somehow cripple the tax avoidance industry. For a counter-argument, see Jared Bernstein. For the Slatepitch approach, see Matthew Yglesias.

While there is empirical research to support the premise that at least some of the CIT is borne by workers, 1) that isn’t the worst incidence one could imagine (consumers would be worse); and 2) that still leaves some of the burden on capital. (There is no evidence, none, contrary to Reich, that the tax is borne by consumers.) That hardly provides a good reason to pee on an existing revenue source in favor of politically dubious alternatives, especially now. Repeal of the CIT is likely to lose revenue, on net.

Economists have been disagreeing on the incidence of the CIT (who bears the burden) forever. As the paper I link to shows, by the formidable Jennifer Gravelle of the Congressional Budget Office, it’s not easy to pin down. Ergo confident assertions of this or that are dubious on their face. First do no harm is a good principle to restrain repeal proposals.

Reich also supposes there is some secret sauce in eliminating the CIT effect on domestic production. Notable in BR’s blurb is the utter lack of empirical evidence. It is an argument based on pure logic, notwithstanding there are counter-arguments that are equally logical.

One ought to recall the late 90s when no such tax relief was required to observe remarkable gains in employment and wages. (Didn’t somebody write a book about that?) This unfortunately dovetails with Obama Administration’s cockamamie plans to doodle the CIT and somehow incentivize domestic manufacturing.

Then Dean weighs in suggesting that eliminating the CIT will cripple tax avoidance. Well sure that is one way to eliminate tax avoidance; eliminate a tax. But untaxed corporations will gain value as tax shelters and spawn tax planning aimed at extracting cash from corporations at reduced or no tax rates. Increased dividends to the rich will stimulate their own use of tax planning. The same for increased capital gains. Capital gains taxation is the Disneyland of tax avoidance. And then, as Dean acknowledges, there is also the possibility of individuals erecting personal corporations to shelter income, which possibility Dean imagines can be easily precluded.

It’s all about aggregate demand, folks. The only tax reform worth discussing is one that would increase revenue, once the economy gets back to full employment. In the meantime we need higher deficit spending and Janet Yellen sitting on interest rates. All the rest is noise.


Comments

Today in liberal self-abuse — 17 Comments

  1. Pingback: My Last Word on Dean B and Corporate Taxes | Jared Bernstein | On the Economy

  2. When the econoblogosphere was young, Mad Max* was probably the main guy who led me to Baker who has in turn proven to be one of the smartest economists around. Has he always had the tendency to focus on supply-side aspects from time to time, like the EITC, work-sharing in Germany, doctor cartels and drug patents?

    *http://youtu.be/akX3Is3qBpw

  3. I would think that all costs of any business, taxes included, are borne by consumer’s directly and workers more indirectly. What’s paid out in other costs are likely to reduce what is paid out in wages. It’s a basic. Pass costs along to the customers. Isn’t that the definition of business? Do something for someone. Get paid for the doing. Deduct all the costs of doing what your business does. Voila! Maybe a profit is left over. The point is the arguments regarding who bears the various costs of business are irrelevant. Costs are always part of the profit and loss calculation.

    Eliminate the corporate tax because it taxes profits. Profits are easily manipulated,e.g.corporate inversion. It’s just too easy to hide profits from the taxing authorities. Why not tax all business transactions at the site of their occurrence? Keeping in mind that even those businesses that don’t show a profit cost the have social costs associated with their business activities. And all businesses benefit in one way or another from the various activities of the government. You know, boots on the ground, pavement on the highways, bridges over the waters, clean water for that matter, etc.

    So just tax all business transactions where they occur regardless of where the home address of the business may be and regardless of the other costs of doing that business. All transactions in the U.S.of A. to be taxed as they occur if they occur within the USA. Not where the deals are made, by the way, but where the goods or services are delivered. I would think that it would be a bit more difficult to fudge the income of such transactions. If it ends up here, it should be taxed here. In the USA, that is.

  4. Here’s another way to conceptualize the effectiveness of taxing transactions at their point of occurrence. The great 21st Century philosopher, Hon. John Roberts (of SCOTUS fame and renown), has opined that corporations, being simply collectives of people, should have the same Constitutional protections as do people.

    By extension I assume that such inanimate animals, the corporations that is, should have their taxes assigned and collected in much the same manner as do actual people. Tax corporate income rather than corporate profits. All animate people pay their taxes on income before the determination of the costs of what had been exchanged for that income. Yes, we humans are allowed some deductions from gross income, but those are not the same as costs of doing business. So why tax corporate citizens on net income? In a global economy wherein the greatest amount of activity is conducted by this new species of Constitutionally protected, ersatz citizens, net income is easily manipulated and confounded by the imaginative selection of costs of business as defined by the global neo-human citizen formerly known as the corporation. Tax such entities at the point of sale as measured by the value of the transaction.

    Oh, and another related, but still good, idea is to recall that the economy might benefit by enforcement of the Sherman Antitrust Act. I know its a quaint idea, but it would be another approach to simplifying the issue of corporate taxation. Too big to fail, too big to tax, too big for the good of the economy.

  5. Maybe someone with more knowledge of supply and demand could explain to me how it is even possible to consider that the tax would be passed on to consumers.

    If I price a product to make maximum profit, it maximizes profit regardless of what the tax rate is. If the profit maximizing price is $10 at a tax of 1%, it is also maximizing at a tax of 10%.

    Of course I also don’t understand why people think the Laffer curve – a theory about taxes on revenue – applies to corporate taxation – a tax on profit.

  6. I’d like to respond to some questions about the corporate income tax in the comments. The question is who actually pays the tax, in the sense of bearing the burden, not necessarily literally paying the tax. There is a double test on any theory. First it has to be logical, second it has to be verifiable with actual data. There has been a lot of research on this question over the past sixty years, if not longer, and the question has never been resolved among economists.

    Economists tell different stories about what might be happening. They depend on assumptions on the nature of the market the taxed corporation is selling into, the nature of the firm, and the state of the labor market.

    First the product side. If the taxed firm has no control over the prices it charges for its product, meaning it operates in a competitive market, somebody other than consumers has to eat the tax. That somebody else is either owners of capital or workers. If capital leaves the taxed sector and employment falls, wages should fall as well. Capital might migrate to a less-taxed sector, or leave the country altogether. Workers bear the tax to that extent. If capital is immobile, for one reason or another, then capital eats the tax. Any discouragement of new investment, which could locate elsewhere, could reduce wages in the medium to long term.

    Suppose the firm has some market power, which means some ability to adjust prices. Then it is more likely that consumers bear some of the tax burden. The firm can’t pass along the entire tax because it may lose too much market share. So part of the burden also falls ‘backwards’ on the firm, since by raising its price it loses some sales. It needs fewer workers, the remaining workers’ wages fall somewhat. If all firms selling into the market face the tax (remember some sellers need not be incorporated), then there could be some shifting to consumers, as well as some reduced purchases overall.

    There are other scenarios. I don’t claim that these are the God’s honest truth, only that the impact of the tax depends on behavioral responses, and these are only analyzed by empirical observation. For instance, how much pricing power does the firm have, and how easily can it move capital and operations to a lower tax status? How sensitive are consumers to price changes?

    It is an exaggeration to say firms can report any profits they like. If this was so the tax would not collect any revenue. No doubt actual profits exceed reported taxable profits.

    The main reason to tax corporations is that it is always easier to tax income ‘at source’ then further down the chain (to individuals). Less of a slip between the cup and the lip.

    Drew’s point corresponds to the case of no pricing power discussed above. It also assumes capital is immobile — it can’t get a better deal with some other use. In many cases this is true. The cost of taking apart a factory and putting it somewhere else could be prohibitive. Some taxed production needs to be located where it is, tax or no tax. You can’t move an oil deposit in response to a tax, but you can direct new extraction equipment elsewhere.

    In the long run capital in many cases is more mobile, especially new capital that isn’t fixed in place yet. For this reason the incidence of the tax on workers could increase over time. If you think the tax has driven a lot of production offshore, then you are really saying it hurts workers the most. The labor movement would disagree.

  7. I’m with Jack. If corporations are persons how come I, a non-corporate “U.S. person” who doesn’t live, do business or earn income in the U.S., am required to file a U.S. income tax return each year and would be obligated to pay taxes to the U.S. on non-U.S. income if I didn’t have sufficient tax credits from paying taxes to Canada — but corps don’t?

    Is flesh and blood citizenship second class to paper incorporation?

  8. That doesn’t work either. Say I’m a monopolist and can set the price at anything I want. I consult my magical chicken entrails and determine that $10 per unit maximizes my profit at $8 each, and with a 0% tax rate, I keep all $8. The next day taxes are suddenly pumped up to 50%. What is my profit maximizing price? Still at $10, giving me $8 before tax and $4 after. There is no other price, according to Mr. Math, that will give me more profit.

    Furthermore, a higher corporate tax would ENCOURAGE investment. Suppose after my standard operating costs, I earn $100. Now, I could declare that as profit, pay $35 and give the remaining $65 to my shareholders. Or I could invest it; for example, buy $100 of copper to keep in inventory. That expense comes before taxes and my tax burden has become zero. But my company is worth $100 more and it all goes to the shareholders when they sell the stock. Ergo, a higher tax will increase investment.

  9. Drew: ” There is no other price, according to Mr. Math, that will give me more profit.” Huh? How about raising the price to $12 and realizing an increased profit to $10 of which the tax is $5. Now I’ve not only covered my tax “burden”, but can also blame the gubment for the increase while I increase my profit by 25%. Not a bad way to do the business, and a far better way to maximize profit than analyzing at chicken guts.

    Not certain, but that second paragraph, “Furthermore….” seems to include some strange accounting practices. Inventory on hand is not an expense, other than the costs associated with its storage. It is part of eventual cost of goods sold, but I think the accountants treat it differently from expenses.

  10. The solution to the problem you describe is to move back to the U.S., incorporate yourself, arrange for a shell corporation in the Cayman Islands to buy your corporate identity and shift what ever income your business is managing to obtain to the newly formed Sandwichman Global, Inc. You can then move back to Canada and possibly not pay any income taxes their or to the U.S.

  11. Pingback: Tax Breaks for Tesla? States Should Think Twice | Xtax

  12. Pingback: Tax Breaks for Tesla? States Should Think Twice | Techyville

  13. If low taxes created jobs, we’d be awash in jobs. More jobs than people, but No! Look around at our economy; there are plenty of toasters of every kind in stores; what’s missing is not another foreign toaster factory, but someone with a job able to buy said toaster.

    To push corporations into being better citizens, and more involved, I propose a 100% corporate income tax. First, what is a corporation for? It’s an investment vehicle and a mechanism for delivering product/service ideally with a profit. The corporations operate unimpeded; deducting all costs including business taxes, expenses, and employee pay and ancillary costs. They can pay their CEO anything they want, and pay any dividend they want. Then allow a 5 year tax-free revolving unlimited cash ‘slush” fund that hopefully would be used for growth/infrastructure/investment. Whatever is left is taxed 100%.
    This pushes cash out into our economy. Money spread out by expense, pay, dividends, and taxes are the power that our economy needs. Give the businesses a 5 year strategic reservoir, then push the rest out into our economy. If they hate taxes, the companies could either pay out more in wages and/or dividends, or lower prices.

    Corporations are sitting on over $2Trillion dollars, and not doing anything constructive with all that cash. Stock buy-backs don’t make jobs or GDP growth; same with cash hoarding. The country is sinking, over half of it going broke while the corporations and the upper 5% have never had it so good.

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