I’m sure Mr. Burns and other evil forces would love to see Dean Baker and me keep arguing about whether the corporate tax should stay (my view) or go (Burns Dean’s view) but given that there are truly misguided people out there who need economic enlightenment, this is my last missive, and a cursory one at that. As the French man who tired of being served eggs every morning said, “an oeuf is an oeuf!”
Numerous analysts, including Dean (and Toder/Viard, e.g.), offer thoughtful and potentially improved tax systems to replace our benighted corporate one (underappreciated point: though Toder/Viard contemplate replacing the corp tax, they actually also spend considerable space in their paper thinking about how to fix it, especially the international part—the part that needs the most repair).
My bottom line is deep and quivering fear about how that would play out in the real world. As a politician I know used to say, “don’t compare me to the Almighty, compare me to the alternative.”
Dean would like us to “assume an average increase of 10 percentage points in the tax rate on dividends and 5 percentage points in the effective tax rate on realized capital gains.” He’s convinced that by ending the corporate tax, “we would see a huge reduction in the size of the [tax avoidance] industry.”
I don’t accept either of those assumptions, based on my read of now and near-future tax politics, and my assessment, based on the tax gap research I cite, on the abilities of tax lawyers to classify income as the type that faces the lowest rates, in this case, newly untaxed corporate earnings. In this vein, I still don’t see him dealing with the question of whether a replacement system would tax unrealized gains—I say “very unlikely” and I suspect he agrees. (He argues you could make back those revenues elsewhere.)
His idea to address my concern that the current tax gap is much larger in non-incorporated than incorporated businesses is to charge businesses $1 million to get out from under the corporate tax. That’s interesting, and might work, but if I’m right that scrapping the corporate code just creates a new tax shelter, his idea is to charge a high entrance fee to gain access to that shelter. That just stokes another concern in my original piece: abolishing the corp code will exacerbate after-tax income inequality.
End of the day, no point in arguing assumptions about counterfactuals. Who knows? Given today’s tax politics, I think it’s reckless to assume you could recapture the revenue we’d lose were we to scrap the corporate code. But I get that other thoughtful folks with whom I’ve argued about this, like Dean, Josh Barro, and Alan Viard, think otherwise.
I will only add that in researching my original piece, I spoke to a few folks whose job it is to try to close the tax gap (the difference between what businesses owe and what they pay) and they all agreed–it was a slamdunk as far as they were concerned–that their jobs would be much harder if they had to collect corporate revenues from individuals. That’s no bottom line, of course—perhaps they lack imagination and optimism about the improvements that could be legislated. But I’m with them.
UPDATE: Max Sawicky (one of the first of the great econo bloggers) gets it!
BOTH THESE GUYS WANT TO GET RID OF THE CORPORATE TAX!!