A recent online debate involving Nathaniel (and me to a much, much lesser extent) brought up corporate income tax. It reminded me of this recent article in the Wall Street Journal. The author lists ten reasons to abolish it altogether:
The “engine of tax complexity disappears. And with it disappears an army of lobbyists in Washington working to get favorable tax treatment for corporations.”
“With no corporate income tax, management would concentrate on what is now pretax profits, an artifact of actual wealth creation.”
“[T]here would be no reason to tax dividends at lower rates to compensate for the fact that they now are paid out of after-tax profits.”
Due to increased profits, “corporations would increase both dividends and investment in plant and equipment, with very positive effects for the economy as a whole and increased revenue to the government through the personal income tax.”
The “stock prices…would rise substantially, inducing a wealth effect as people see their 401(k)s and mutual funds rising in value.”
“[T]he distinction between for-profit and nonprofit corporations would disappear.”
“[M]uch of the $2 trillion of foreign earnings, now kept abroad to avoid being taxed when repatriated, would flow into this country.”
With no corporate income tax, “foreign corporations would flock to invest here…”
In order to compete, foreign countries “would be forced to lower or eliminate their own corporate income taxes, increasing domestic corporate profits and thus domestic investment and personal income…”
Finally, “eliminating the corporate income tax would deal a blow to crony capitalism.”
Today will forever be remembered as the day I almost agreed with a DailyKos article. Almost. It will also be remembered as the day kos became a right-wing fiscal conservative, almost.
We start off with something everyone should be able to agree on: Eliminate corporate tax, seriously. Kos cites Robert Reich for a universal, non-partisan reason to ditch corporate taxation:
But in many cases, depending on the structure of the market, a significant share of the actual burden of paying the corporate income tax is often borne instead by employees in the form of lower wages, or consumers in the form of higher prices.
This is true. No matter how good “corporate taxation” sounds, the reality is that all tax burdens are ultimately born by people. The most obvious problem with corporate taxation is that we don’t know who those people are. We do know that some of them are the employees and customers of big corporations, however. For this reason alone, corporate taxation is unconscionable.
Kos then goes on to make another good observation, but unfortunately this one has ideological implications that run directly counter to his belief. US corporate taxcauses multinational companies to stock more than $2.1 trilllion in off-shore accounts. If there were no corporate tax, they would bring most of that $2.1 tillion home. Kos calls this “one hell of a stimulus package for the country.” He’s right, but he’s sounding right-wing, and this triggers an intellectual gag reflex in the next paragraph:
However, this isn’t about free money for the corporatists. Fact is, the big companies are good at avoiding taxes by playing offshore finance games, while small businesses end up paying higher tax rates. Aside from the matter of fairness, it’s poor economics, as those small businesses—the driver of most job creation in our economy—could use that tax money to invest in new employees and equipment.
He’s right that small business drives most job creation, but small businesses are usually not C-corps and so they don’t pay corporate taxation. They are pass through organizations, so f you want to lower their tax rate you have to lower the personal income tax rate. The segue from corporate taxation to small business makes no sense. Worse than making no sense, however, Kos is digging the hole deeper. Whether he admits it or not, kos is now arguing to eliminate corporate income tax (to get that $2.1 trillion stimulus) and to lower personal income tax (to reduce the tax burden on the small companies that provide most new jobs in this country). This triggers a second intellectual gag reflex:
But of course, this isn’t an effort to starve government, it’s to move the tax burden on those who can actually afford it—tax capital gains at the same levels (if not higher!) than regular income.
Lest he sound like an anti-tax right-winger, kos has to get around to sticking to the man some how. So he proposes that we make it all up in capital gains. This plan has two enormous defects. First of all, taxing capital gains lowers economic growth, which counteracts the stimulus and job-creation effects of the previous arguments he just made. Secondly, the numbers he borrows for his tax plan make no sense:
For example, a tax of $1 on every $400 of stocks traded (0.25%; one-quarter of one percent) and $1 on every $800 of currency and debt trading including derivatives (0.125%, one-eighth of one percent). This fee (tax) would have raised between $750 billion and $1.2 trillion during each of the past five years (2005 – 2009).
He’s saying: “Let’s pretend we taxed stock trades for 5 years and nobody reacted to the taxation.” Not very realistic, is it? The reality is that if you skim 0.25% of every trade off the top, there are going to be a lot less trades. And so we’re gong to raise dramatically less revenue then he suspects and we’re going to undermine the economy-expanding effects of the first two tax-cuts. All because of ideology.
The really sad thing, of course, is that it takes me (a conservative) to point that he if kos really wants to “move the tax burdn on those who can actually afford it” then he should try a consumption tax. Then we’d actually be able to offset some of the losses from the other forms of taxation and actually hit rich consumers. Oh well.
In an editorial for the Washington Post, respected tax economist Martin Feldstein lays out a plan for helping to balance the budget that is so sensible and effective it has little chance of survival in Washington. (I called him “Marty” because that’s what Joel Slemrod, one of my professors at Michigan, always called him.) The plan is simple: instead of trying to eliminate the major tax expenditures (like the mortgage interest deduction), just cap them. He suggests a cap that is based on a percent of AGI (adjusted gross income, which is roughly speaking the amount you start from when calculating what you owe in taxes). This would spread the impact of the cap across all tax payers, but of course the rich would pay much more because they have a much higher AGI.
The plan would raise about $140billion in 2013. By contrast the President’s plan–which is also based on limiting tax expenditures but focuses only on those who make more than $200,000–would raise about $21 billion. Over the next 10 years, Feldstein’s plan would raise $2.1 trillion. President Obama’s would raise $300billion. Feldstein claims that the Obama plan isn’t fair, but I don’t think that’s the strongest argument. The stronger argument is that there’s only but so much cash you can raise if you focuse on the rich. Households making more than $200,000 / year are just a small fraction of the population, and if you include only individuals making $200,000 / year there just aren’t enough of them to raise significant revenue. That should be obvious from the numbers: Feldstein’s plan raises 7 times the revenue, but it does so by applying the tax to about 30 times the population: in other words, the rich still pay much more per-person on Feldstein’s (which is as it should be). Feldstein’s plan is also fair because, by capping deductions, it specifically limits the rich from being able to use expensive attorneys to circumvent the tax code.
The plan should be palatable to both parties. For the Republicans: it moves us towards a balanced budget without increasing tax rates. For Democrats: it increases revenues and makes the tax code more fair (by preventing the rich from being able to avoid taxation). I also like it because a cap on deductions is a necessary first step towards eliminating deductions. I’m not sure if all deductions should be eliminted (Feldstein specifically exempts charitable giving, for example), but most of the big ones (mortgage interest and health care) absolutely should be eliminated. Eliminating the deductions all at once would be too traumatic to our economy, but capping them is a great first step in moving towards a gradual elimination.
So the fiscal cliff is looming closer and closer, and a new poll shows that “Americans clearly want Washington to solve its looming budget crisis, and they clearly reject almost every option to do that”. It sounds like typical voter stupidity at first, especially since a lot of the options on the table are not only palatable, but probably should be enacted for their own sake. The article lists: “raising taxes on everyone, cutting Medicaid or Medicare spending, raising the age for Medicare, or taking away tax deductions for charitable contributions or home mortgage interest,” and the last three all seem like no-brainers to me.
Before you start to feeling too smug, however, you can head over to the Wall Street Journal and try your hand at balancing the budget on your own. You start with the $1,102,000,000,000 10-year deficit and a menu of choices for raising taxes and cutting discretionary and entitlement spending.
Last week I wrote a couple of posts about the Hardy Boys and magical ponies, although actually they were about marginal vs. average and statutory vs. effective taxation. Today, we get to the good stuff: how much more should the rich pay? It makes sense to start, however, with how much they already do pay.
When Mitt Romney made that infamous “47%” remark, it didn’t take long for people to shoot that full of holes. But, in my previous post on taxation, I also said that the idea of corporations getting away with not paying their fair share was also dumb. You might ask “Why’s that?” I’ll assume that you did ask, and give you the answer in this post. With magical ponies.
I’m going to write about taxes. Probably not the smartest move if I want to attract more readers (which I do), but I’ve got two things going for me. First: I’ll shamelessly target nostalgia with some gratuitous Hardy Boys references. Secondly, I’m betting that a lot of people are as tired of hearing bumper-sticker political arguments as I am. Topics like marginal vs. average tax rates or statutory vs. effective taxation might not sound thrilling, but you know what’s even less thrilling? Listening to your relative tell you that he’s going to “go Galt” if he has to keep supporting that slacker 47%. Or maybe hearing your high school buddy argue that it’s criminal for corporations to get out of paying their fair share of taxes. (If you don’t know why one or both of those is stupid, just keep reading. Soon you will.)