Coporate Income Tax

[Ardentfrost]

Asymmetrical Information: You heard it here first

You heard it here first

Greg Mankiw points to a new paper indicating that 70% of the burden of the corporate income tax falls on employees.

I made this point long ago: for all that progressives wail about making corporations pay their "fair share", you can't tax a corporation; you can only tax that corporation's employees, shareholders, or customers:

As my favorite macroeconomics professor pointed out, it is impossible to tax a corporation because the corporation is just a fictional entity designed to pass profits back to its owners. When you say you're going to "tax a corporation", the corporation doesn't go to the money farm to harvest some more cash to give to the government so we can expand job training for unwed mothers -- some real person is going to pay that tax. When you put a tax on wages, such as social security or the unemployment tax, the employer doesn't say, "oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits. They hire fewer employees, because each employee is now more expensive. This costs real people money. When you up the corporate tax, either the employees pay, because the firm can't afford as many of them; the customers pay, because the firms have to raise their prices to cover the taxes; or the shareholders pay because dividends are lower and the company is worth less. And before you liberal types start rubbing your hands in glee at the thought of those pained shareholders, keep in mind that the largest shareholders in companies are insurance companies, which invest in stocks in order to make the money they need to pay off when your house burns down; and pension funds, making the money to take picketing US Steelworkers off the streets and put them into good homes. The other big holders are mutual funds, which is what most of us have our 401(k)'s in. So when you say "I want to tax corporate profits", try silently saying to yourself "so that Mom can sell the condo in Florida and move in with me."

While undoubtedly the discovery that most of the tax burden falls on employees will be for some a strike against the tax, and for others a sign that we need some stiff laws to force those corporations to place the burden elsewhere, it seems to me that this piece of information makes the corporate income tax no less attractive than it was before--which is to say, not at all. Levying a corporate income tax is a very inefficient way to do what we want, which is to redistribute money from the company's richer owners, customers, and managers to its poorer employees.

(All right, maybe we don't all want to do this; no doubt many of my readers are even now cringing in horror at the thought. But let us posit, for the sake of discussion, that we do want to do this, because that is at heart of all the arguments I have ever heard in favour of the corporate income tax, and even assuming the ends, the means make no sense.)

Let's say that 100% of the distribution fell on shareholders and executives. Would it make sense to tax the CEO of a small tool-and-die maker (assuming such things still exist) at the same 35% as Michael Eisner? Aunt Minnie's 100 shares of AT&T at the same rate as Bill Gates' Microsoft stock? We already have a very good means for taxing income derived from being an executive, or owning stock: it's a little thing I like to call "the progressive income tax".

Now, several of my interlocutors have argued that if we don't have a corporate income tax, people will shelter income in corporations, by (for example) incorporating themselves and charging their rent to the corporation. But people already have incentives to try these sorts of stunts, because corporations, unlike people, get to charge things like rent and interest on loans against their taxes. You can incorporate right now, funnel all your income into the corporation, and have the corporation pay all your bills. Say you make $100,000 a year, and pay roughly 30% of that in tax. Furhter assume that your expenses are $80,000 a year, and you save a thrifty 20% of your income. A corporation with your income and expenses would pay taxes only on the income in excess of expenses. .35 x .2 = an effective tax rate of only 7%.

Wow! Why isn't everyone pulling this dodge? Why, because the IRS has rules against it, that's why. Anything the corporation rents or buys for you is treated as income to you, which you are taxed on. There's no reason that would change just because we eliminate the corporate income tax. Yes, there are other ways to shelter your income within a corporation, but in general, I don't know of many which would be possible without the corporate tax that aren't possible--and attractive to those in high brackets--now. Others argue that untaxed corporations somehow allow people to accrue more financial power through their ownership, which makes no sense to me; Bill Gates is powerful because he controls a lot of Microsoft stock, not because most of his earnings on that stock are tax-deferred.

Impeach the corporate income tax. Impeach it now.

Very good points made, especially the quote from the economics professor where he says you cannot tax a corporation because it isn't an entity with exclusive funds... employees, their salaries, and prices are all tied into coporate monies.