Andrew Olmsted dot com: End Corporate Taxation

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December 01, 2004

End Corporate Taxation

Hats off to Kevin Drum, who uses his soapbox to call for an end to corporate income taxes, an idea whose time has come. The bottom line for opposing corporate income taxes has always been simple for me: all those taxes do is end up as higher prices or fewer jobs available for the people who need them most. Taxing business is just a clever subterfuge by people who want to raise taxes, but also want to get reelected. So they offer the 'free lunch' of a tax on corporate income, because we all know that the people who own corporations light huge Cuban cigars with $100 bills and laugh about the latest scandal down at the country club.

As Kevin points out, this isn't a free lunch either; conservatives would have to offer up a compromise to address the $131 billion in government revenue this would take out of federal coffers, and I'll wager Kevin's not willing to settle for cutting government spending (at least, not the kind I'd like to cut). But I'd be willing to trade slightly higher income tax rates for an elimination of corporate taxes, despite my general aversion to the income tax. While the swap would have to be done using a static model, I'd be willing to be the deal would end up raising more money for everyone as businesses would be able to cut some costs associated with not having to pay corporate taxes, creating more jobs and greater economic prosperity. Or maybe not; I'm not a seer or an economist. But I say it's worth a shot; with a static model, there would be nothing to lose in terms of government revenue, and there's an awfully big upside to encouraging economic growth.

Posted at December 1, 2004 06:42 PM

Andrew Olmsted

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I'm trying to picture corporations using the money they save to create a corresponding number of new jobs, or to raise income or benefits for current employees...instead of raising the salaries of the higher-level executives and making ever-larger stock divident payouts the vast majority of which will wind up in the hands of the already wealthy. Eliminating corporate taxation benefits the wealthy to a disproporionate degree. The net result, in fewer years than you might want to believe, is that the rich will be a lot richer and the poor will still be grovelling for subsistence.

In addition, corporations went to the SCotUS to get themselves legally proven to be "persons." As such, they benefit from the same government-provided services as the rest of us do and it's fair they should pay their taxes.

If not...would corporations still be able to endorse and support political candidates, go to court to protect their reputations, own property, and claim the benefit of police and fire services, and all of those other details?

Tax reform? A good idea, but I disagree with you and Kevin both that corporate taxes are the way to go.

For instance, I see you don't address the subject of corporate welfare in legislation, something Kevin does address. Would you make this illegal? How do you plan to prevent it? (Don't be naive and tell me the welfare wouldn't exist without the taxation. There are more things the government does to help business than tax breaks. There's research subsidies, protection from imports, and forcing USofA-manufactured goods on "trading partners." Would you still support these things?)

The problem isn't that corporations pay too little, it's that the tax system is too complex. Simplify the system and eliminate a lot of those tricky little loopholes and then let's see what remains. If it looks then as though corporations are overpaying, we can talk about tax cutting (not elimination) but as long as a corporation is a "person" then they should pay taxes.

I'll bet you're sorry you invited me back already?

Posted by: Anne at December 2, 2004 04:33 PM

Anne,

One, welcome back. Always nice to have a dissenting opinion, even when it's fantastically wrong. ;)

Two, I recommended a revenue-neutral approach to test the proposition. Even if you're correct and the corporations would simply pour their additional funds into new perks for their CEOs or their stockholders, the money going into the government would be the same, so it's a risk-free proposition. I'm even willing to trade a raise in taxes on rich people, so the revenue would still ultimately come from the rich.

Three, you're wrong anyhow. If companies end up with additional revenue, a lot of that is going to end up getting plowed into growth because that's how business works. If only one company takes that tax break and pours it into some internal investments, other businesses are forced to follow.
That's how the market works, and it's why profit margins generally trend downwards: if you and I can both make a widget for $5, maybe we'll start out selling them for $10 and making a great profit of $5/widget. But let's say there's a market for 10,000 widgets and right now we're splitting it 50-50. So we're both making $25,000 on widget sales. What happens if I cut my price to $9? My profit goes from $5/widget to $4/widget, but I'll pick up a lot of your customers (all of them eventually if you don't respond) and I'll probably even expand the market, since if there are 10,000 people willing to buy a $10 widget, there are probably an additional 500-1000 people willing to pay $9 for a widget. So now you cut your price, maybe even going to $8. We won't end up selling at cost, of course, since there would be no point to being in business at that point, but it a really competitive industry, our margins will quickly shrink to very low levels.

Four, there are certainly other issues to address, from the legal status of corporations to corporate welfare (which I support ending whether corporate taxes are cut or not, so I couldn't possibly 'still' support them).

Bottom line for me is simple: try it as an experiment, with a tax package that eliminates corporate taxes in exchange for raising certain other taxes sufficiently to cover the revenue lost from corporate taxes. Then wait five years and see what happens. If you're right and it is just a boon for the rich, then we can always reinstitute it. But that's the problem with the country these days: nobody is willing to try anything new, because it might be worse. Did it ever occur to you that it just might also be better, but the only way to find out is to try?

Posted by: Andrew at December 2, 2004 04:57 PM

Where do you think government spending would realistically be cut that much (hint: the Department of Pork and Waste does not exist and Tom DeLay is increasing the Pork in the departments that do exist). Let's say "we give people (shareholders of corporations) their money back" and they consume some of these tax breaks. BY DEFINITION - national savings FALLS (unless some massive magically government spending cuts do fall from heaven). So investment falls - not rises. You don't need to get past week one of Macroeconomics I before they explain the basic accounting of GDP accounting. Enjoy!

Posted by: pgl at December 5, 2004 03:10 PM

I already said I don't think that government spending would be cut, which is why I suggested offsetting the corporate tax cuts with additional income taxes on the higher brackets. And I'm not sure what your point regarding national savings comes from; I didn't say anything about savings anywhere in the post. But I don't think you're correct in any case; we're shifting from taking money from corporations, who simply pass the costs on to consumers, to taking money from higher income taxpayers. I would think this would be viewed as a good thing.

On a separate note, if you have nothing better to do than spew vitriol, perhaps it would be best if you did so on your own site. If I'm wrong, I'm more than willing to hear about it, but I see no reason to tolerate insulting commentary.

Posted by: Andrew at December 6, 2004 12:39 AM

Just a quick note. Your proposal suggest that we eliminate only fedral income taxes. I agree it is worth a shot. The local and state taxes, which provide fire and police protection could go on, either as direct taxation or a 'fee' system. The impact on local and state communities would be negligible under this scenario.

The problem most people seem to have with cutting out the income tax on corportations is that they view corporations as inherently evil, something of a value judgement, not based on data. I note that no one seems to have addressed your comment about corporations simply passing taxes through as part of their cost.

With nearly everyone now having IRA's or 401k's those higher dividends would add to most people's retirement savings, not just go to fat cats.

Posted by: dad at December 6, 2004 10:34 AM

Andrew - here is the problem with all of the free lunch supply side rhetoric. You cannot legitimately do an economic analysis that ignores the salient features of a change in fiscal policy. Cutting tax rates might have a modest pro-investment incentive effect but it cutting rates also induces people to consume more unless the specific tax cut is offset by a tax increase somewhere else. And it does no good to say - well let's pretend the politicians are fiscally responsible if we know they are not. So if we gave fiscal stimulus that encourages more consumption but not does reduce government purchases, then it goes without saying that the nation's savings falls - which means a higher cost of capital in a general equilibrium model. Simply because you failed to note this in your post does not make it disappear.

Either consider the full economic picture - or admit you are not doing real economics.

Posted by: pgl at December 6, 2004 03:46 PM

Posted by: online poker at January 19, 2005 02:56 AM

Posted by: cialis at January 19, 2005 03:25 AM

December 01, 2004

End Corporate Taxation

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