My Last Word on Dean B and Corporate Taxes

August 27th, 2014 at 9:14 am

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!!

mrburnsdeanb

 

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9 comments in reply to "My Last Word on Dean B and Corporate Taxes"

  1. Tiree says:

    If there is one thing I’ve learned over the years, it is that complex designs over tax systems, financial systems or the like don’t work. When anything like this is brought into the public eye, the public sees only what the politicians want them to see. In the case of a tax system, it has to be simple enough for people to intuitively think it is fair or else it will be turned against the people.

    I agree with Jared on this issue. I think it is important to have both theoretical and practical ideas around, so I appreciated this debate.


  2. smith says:

    Let’s say Acme Corporation projects $1,000,000 in profit.
    Under the current tax regime it can either spend all or part of the $1,000,000 within the corporation, on things like expansion, investment, R & D, wage increases, new hires, or it can distribute 60% to owners. The other 40% would go for taxes to be spent for the public good, but not directly benefiting stockholders.
    With no corporate tax, 100% can be distributed to owners.
    At the two extremes (all spent or all distributed) the choice is growth OR 40% to government (which can foster growth). The point is that the corporation is currently penalized for not growing, as are the owners too. Since the privileges of incorporation are designed to encourage investment and growth, it doesn’t make sense to remove an important incentive to aid further growth. While not a fan of too big to fail, and dominant players in oligopolies who exert too much control over prices, wages, markets and innovation, why erode one of the good aspects of allowing corporations to exist. It’s hardly a trivial matter to be ignored.


  3. djb says:

    in their minds it is not get rid of corporate tax or income tax (should be wealth tax anyway, not income)

    in their minds, supply siders [plus mankiw] that is, it is get rid of the corporate tax PLUS the income tax

    so i wouldnt give an inch

    you’ll never get the inch back, and get nothing in return for it


  4. JohnR says:

    It’s always dangerous to let the assumptions go unexamined – especially if those assumptions are based on a world where man is angelic instead of our own world, where, alas, some men will gnaw their own legs off if that gains them a penny more. In other words, I’m with you on this.


  5. Robert Salzberg says:

    Today’s political climate won’t allow revenue raising tax reform. Ending the corporate income tax and replacing it in a revenue neutral way has support from Republicans, Democrats, and Independents. Great to see Dean Baker presenting logical alternatives that would make compliance easier and avoidance harder.

    Republicans are in a demographic death spiral so as long as America clings by its fingernails to its grip on Democracy, eventually we will have a Congress and a President who realize that carbon taxes, revenue raising tax reform, and rational investments in education, research, and infrastructure are worthy policies.

    It has been 28 years since the last major tax overhaul. Why not design a tax system that is best for Americans? Why not sooner rather than later?


    • Geoff says:

      I do not think Republicans would actually support revenue neutral tax reform. They might say they support it as long as it’s presented in the abstract. But I’m confident that they would balk at any actual proposal because they wouldn’t want to be on record supporting any specific tax increase.


    • Alex Bollinger says:

      This:

      “Ending the corporate income tax and replacing it in a revenue neutral way has support from Republicans, Democrats, and Independents. ”

      contradicts this:

      “Great to see Dean Baker presenting logical alternatives that would make compliance easier and avoidance harder.”

      If avoidance is really harder, then this reform will be revenue-raising, not revenue-neutral. Tax avoidance is just another way of lowering overall taxes. Republicans are actually not as stupid as they seem, and they will oppose any tax scheme that increases the amount of money the government gets from rich, no matter how it’s phrased.


  6. Richard Freedland says:

    I am surprised that you missed the well used tax loophole that makes Warren Buffett the big winner in the BK-Horton merger. By taking advantage of the dividends received deduction, Buffett will receive preferred shares dividends from the merged entity of which 70% will avoid any taxation by Berkshire. A corporation that receives dividends from ownership of shares in another corporation, avoid tax on 70% of the distribution. Buffett will receive a return on his $3 billion investment in excess of ten percent. And he has preferrence over the common shares as well. He did this with GE and Goldman Sachs as well as others. BK will have to compete with Dunkin Donuts, Starbucks and IHOP in the US. BK has had losing products for years and have bought and sold the company in the past. Buffett is the real winner as long as he is repaid. The new entity will have to overcome a lot of debt and Hortons is a Canadian legend but unknown in the US. BK will have to sell a lot of donuts in the US to pay for the merger.


  7. Jill SH says:

    My list of favorite things to do before we repeal the CIT:
    1. Make all forms of personal income subject to the same graduated rates that now apply mainly to wages and salaries. No more separate tax rates for capital gains, carried interest, etc.
    2. Institute a carbon tax AND a financial transaction tax.
    3. Close all corporate loopholes.THEN drop the rate to be revenue neutral. (The horse and cart order is very important.)

    Then, and only then, talk about eliminating the CIT. But if corps. are persons like us (real, natural, mortal) persons, then they should pay taxes too.

    But you know all this, JB, because I learned a lot of it from you!


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