How about that? I’ve got a rare and welcome chance to have a friendly disagreement with an admired friend. That would be economist and my co-author on many projects, Dean Baker, who has some different, and interestingly nuanced, views from my own on getting rid of the corporate tax.
First, let me summarize my argument. It’s not just that I worry that getting rid of the corporate tax would be a tax cut for the wealthy, as they mostly own the corps and indirectly pay taxes on their profits. It’s that we’d lose a lot of needed revenue that would have to be made up somewhere else, either through larger deficits, spending cuts, or tax hikes on the non-wealthy.
Dean makes a few counterarguments. First, since some minority share–he says 20%–of corporate taxes fall on wage earners, getting rid of the tax would lift their wages a bit.
Jeez, I dunno. Maybe, but I’d bet bargaining power trumps tax-incidence analysis, meaning it’s not at all obvious that the owners of capital would share their tax break with workers absent very tight labor markets, more unions, etc.
Second, Dean makes the better point that by getting rid of the corporate tax, you’d get rid of the corporate-tax-avoidance industry, including PE shops that make lush pickings off of the current setup.
He may well have a point there, but again, I’m skeptical, based on what I wrote in my piece:
The problem is that [abolishing the corporate tax] risks turning the corporate structure itself into a big tax shelter: If income generated and retained by incorporated businesses should become tax-free, then guess what type of income everybody will suddenly start making? Taxes delayed are taxes saved, and with no corporate tax, anyone who could do so would structure their earnings and investments to be “corporate earnings,” untaxed until they’re distributed.
In other words, while you might whack the PE restructurers, it seems implausible to me that the tax avoidance industry will shutter their operations, admitting they’ve been defeated once and for all. They’ll just go back to doing what they always do: redefining the income of their wealthy clients as the type of income that’s least taxed.
Moreover, my skepticism about the ability to make up the lost revenue from the corporate tax on the individual side wasn’t based on gut instinct, but on this research:
One study found that the tax gap — the share of taxes owed but not collected — was 17 percent for corporations and 43 percent for business income reported by individuals. That research is over a decade old, but more recent tax gap research found that business income taxed at the individual level was the single largest source of the gap, and that sole proprietors report less than half of their income to the I.R.S.
Finally, though he doesn’t mention it, I’m pretty sure (based on discussions we’ve had) that Dean agrees with me that a core idea of some anti-corporate-tax folks–taxing the unrealized appreciation in corporate shares held by individuals–would never happen, or at least must be realistically considered a huge political hurdle. That concession alone strikes me as a reason to be extremely cautious about scrapping the corporate tax.
I’d say our disagreement comes down to this. Dean concludes that it’s “…very plausible that we could design a system that will raise as much money from the rich with an increase in personal tax rates, while at the same time destroying the tax avoidance industry.” I would like to believe he’s right–he’s a smart political economist who makes way more correct predictions than others–but I think that flies in the face of history.
And in these days, with this current and near-term-future Congresses, with all the concentrated wealth influencing political outcomes of precisely this type, with the budget pressures we already face, I think it would be a huge mistake to take the bet that he’s right and I’m wrong.