"The corporate income tax makes no sense whatsoever," said Robert Frank, a professor at Cornell. "We don't want to prevent Microsoft and General Motors ... from investing more and improving their product line," Baker said. "That's a good thing in my view."
Our economists said if you want to tax rich people as public policy, then tax rich people — tax the people who own corporations. But taxing the corporation itself is taxing the thing that really does create jobs.
In my personal opinion, the money does more good in Google's hands than in the government's hands.
So in the vast world of disciplines, there are two kinds: disciplines that are scientific, and disciplines that aren't. Economics is one of the latter. There is no reason to take what economists say as conclusive, specially in the domain of macroeconomics.
The comment by the Cornell professor above also ignores a very simple fact: capital expenditures are tax deductible. The idea that taxation directly reduces the money available to invest in the company or hire workers is just factually incorrect. It may reduce those things indirectly, through deadweight losses in the economy, but tax law is structured so that capital expenditures and salaries are paid for with pre-tax dollars.
There is a strong fairness argument to taxing corporations the same as individuals: corporations are treated as separate persons for liability purposes, they should be taxed as separate persons for tax purposes.
There is a lot of science in economics, but where it becomes unscientific is when humans are involved. Much early macroeconomics made the simplifying assumption that humans made rational decisions, and that they had perfect information when making these decisions. That is useful for some models, but the real world is much more complex than that, and that is why the models often don't reflect reality. There is a lot of science in economics though.
If the business tax rate is different to the individual tax rate then this creates some distortions, but more importantly there is the issue of double taxation. In New Zealand dividends/drawings are treated as tax paid, i.e. the business has already paid tax on this income, so no further tax is due. In UK, and I think USA, the individual would be taxed again, hence there is a double taxation on business profits, which does seem kind of unfair.
Income tax is by it's nature a transaction tax: income is taxed when money changes hands. But that income is counted as income each time it changes hands, so that's not "double taxation." Say we have an economy with just you and me. I make $100. I'm taxed $20 (20%). I give you $80. You're taxed $16 (20%). Total income = $180. Total taxes paid = $36 (20% of $180).
The mistake is assuming that the corporation's money is the shareholder's money the minute the corporation makes it, i.e. that the corporation is a mere proxy for the shareholder. It's not. The corporation is a separate person. If the corporation incurs a liability (say one of its trucks runs someone over), it's not automatically the shareholder's liability, again because the corporation is a separate person. A dividend payment is no different than the payment between you and me in the example above. It's not "double taxed"--it's taxed each time it is counted as income, the same as every other payment.
There is a deep symmetry here between how income is treated between separate entities and how it is taxed between separate entities. Say we have a married couple. The husband stays at home and does housework, and the wife gives him a $1,000 a week allowance. If they divorce, but the husband still does the housework in return for $1,000, then GDP (i.e. the sum of national incomes) goes up by $1,000. This is the nature of the GDP calculation--when you break apart an internal transaction and make it a market transaction, GDP goes up without anything else changing. Taxation precisely mirrors this. The husband doesn't pay taxes on his $1,000 while he is married and part of the same taxable entity. It's not income to him. But if they divorce, it becomes income to him. GDP goes up and taxes go up by the same proportion.
Economics is scientific in nature. It is just hard to model and predict the behavior of humans. That doesn't mean that economics can't tell us anything conclusive.
Even though capital expenditures are tax deductible, the returns from capital expenditure are being taxed at a higher rate. This makes consumption relatively more attractive to shareholders which is bad for economic growth. It's not about the money available to invest, it's about the incentives to invest that money.
>We don't want to prevent Microsoft and General Motors ... from investing more and improving their product line
A lack of cash is not what stops these companies from improving their product line. Apple is sitting on $100 billion (maybe somewhat less now that they're doing dividends?). Corporate taxes are not preventing Apple from employing more people, they have no need for more people. If Apple were taxed less, they would not hire more people.
I am highly skeptical of the claim that removing corporate taxes would create jobs in other sectors as well. Why would GM need to employ more people if their taxes were lowered? Consumer demand is unchanged, they don't suddenly need to pump out twice as many cars. Innovation and improvements on product lines don't come from the number of product designers a company has.
I've never understood that argument. If anything, it's the other way around: Reduce taxes on the middle class so they buy more cars and iPhones. Reducing tax on corporations and the wealthy doesn't do much. Is a rich person going to buy another car if you reduce their taxes?
Meh. "Tax rich people" is not a tax plan. How do you tax them? VAT? Property tax? Income tax? Capital gains tax?
All taxes are distortionary. It's their nature. If you ignore the benefits gained from programs that tax dollars buy, all taxes are bad for the economy.
The problem with capital gains and corporate income tax is not (just) that they're bad for the economy, it's that they're de facto optional for multinational entities because of transfer pricing. Cash doesn't have a country, so anyone with more than one country just puts their cash in the country that takes the smallest piece of it.
Now we hear the cries of "but they made the money here" -- OK, sure. So make that the rule then, if that's what you care about. If you sell your product in a country, you pay its taxes. That's sales tax or VAT. If you make your money employing a country's workers, you pay its taxes. That's personal income tax.
If you like you can specify that the product tax will be paid by the seller and the labor tax will be paid by the employer. That may actually provide some amount of leverage to buyers and employees in price negotiations (to the extent it doesn't push sellers and employers toward other countries), but at the end of the day it is what it is: A tax that makes products more expensive or reduces the amount that employees bring home, but can't be avoided by sly accountants and tax lawyers if you still want to sell products or hire workers.
Those taxes are hard to avoid, but they are bourne by workers/consumers, regardless of who you collect them from (i.e. the economic incidence of a tax is not the same as the legal incidence). I.e. foreign entity Google profits doing business in your jurisdiction, but your citizens (both consumers in your country and workers in your country) bear the whole tax burden.
Even assuming corporate taxes were perfectly collectible (they're not, that's the primary problem with them). Why would it make sense to disincentive profit than to disincentize wages or sales.
(Taxes are at heart, a disincentive, or more properly, a Price, to do the a certain thing.)
Arguably the least distortionary thing you can do, if you must have taxes, is to disincentivize labor and profit by the same amount. Otherwise, you drive people to engaging in one sort of activity over the other.
Then given the difficulty in measuring taxable profit effectively, it sounds like you should be in favor of a consumption tax that doesn't distinguish the source of the money being used to make the purchase.
No, because consumption taxes don't reach profits that aren't spent on goods and services. They are massively regressive. It over-incentivizes "investing" money. There are three assumptions by economists in this regard that don't reflect reality: 1) the world is open, resources are unlimited, and growth is always possible; 2) that investment is always good; 3) distribution doesn't matter. None of those assumptions are true.
>No, because consumption taxes don't reach profits that aren't spent on goods and services.
Nothing lasts forever. Eventually the profits will either be spent or escheat to the state when the last heir to a fortune dies without any descendants. And you can't very well benefit from having money if you never spend it.
>They are massively regressive.
This is trivial to fix. Send everyone a check for a fixed amount every month as a "tax refund" and the effective tax rate of those with less money to spend drops or becomes negative.
>It over-incentivizes "investing" money.
All taxes are distortionary. If you tax income then you under-incentivize investment. Why is over-borrowing and over-spending better than over-investing?
Would you care to elaborate as to what bearing your list of assumptions has on the issue? It wasn't clear from your post.
>Those taxes are hard to avoid, but they are bourne by workers/consumers, regardless of who you collect them from (i.e. the economic incidence of a tax is not the same as the legal incidence).
Yes and no. Nominally imposing the tax on the seller or employer is better for the buyer or employee -- it doesn't necessarily mean the seller won't be able to pass the tax on, but it helps. For example, if the employee is making minimum wage, the employer can't reduce their compensation by law, so imposing a labor tax on the employer will force them to eat it because they're not allowed to take it out of the employee's compensation. If the tax was nominally on the employee then it would instead come right out of their minimum wage paycheck. And the same goes for any other mechanism that tends to prevent employers from lowering wages: If you have an employment contract that specifies your compensation, you keep getting paid what you were agreed to be paid even if your employer now has to pay more taxes instead of you. If you have a trade union, the union is going to have a better shot at preventing a wage reduction than demanding raises to counteract a new tax, etc.
In the longer term, as employers have time to hire new employees with new contracts or refuse raises etc., the free market catches up with the tax changes. But that doesn't mean the tax is paid entirely by consumers and employees. If sellers could raise the price of their goods by the amount of a newly imposed VAT without reducing their sales then they would have done it already regardless. When the VAT is imposed industry-wide it allows some cover for price increases, but not by 100% of the tax amount except for in rare cases (such as where the profits in that industry were already legitimately non-existent and passing on the full tax is the only alternative to going out of business). In non-collusive markets the existing players will be fighting to keep prices close to where they were in order to retain as much of their existing sales volume as possible to keep their sunk cost infrastructure utilized, which will require them to eat a sizable chunk of the tax burden.
More to the point, how is that possibly worse than it is now, with international corporations nominally paying a tax on profits but then arranging to not have any profits in jurisdictions where taxes are high, and then subjecting local small businesses to the taxes avoided by their larger competitors?
When you tax something you disincentive it. Corporate income tax is a disincentive to profit.
Worse, profit is too intangible, and essentially all companies above a certain size hire teams of creative accountants to either 1. Create faux losses, or faux deferments. (See Hollywood). Or just locate abroad, see Google.
It's a tragedy of the commons. If you're not doing these things, you're at a competitive disadvantage.
Much better to tax wages, property, sales, etc. And of course, as progressively as possible.
Overly complicated or bureaucratic schemes never work.(Carbon tax, Trading), instead tax fossil fuels.
Edit: Perhaps Iand has already said this in a simpler manner:
"They are pointing out that they pay taxes on tangibles such as salaries, VAT and business rates. Corporation tax is based on the fungible concept of profit and really is unworkable."
Yes, it needs to be pointed out that the corporate income tax is basically regressive. Large corporations with enough scale can afford to implement advanced tax avoidance strategies along with armies of accountants, lawyers, and shell companies.
Your average small business and even larger private companies can't afford to do this at all. Yes, they have the S-corp option available, but a C-corp paying 3% effective tax rate on its profits and its shareholders only paying a dividend tax is superior to being an S-corp and paying payroll taxes on your paycheck to yourself (required) and then personal income taxes on the rest.
39% corporate tax rate is really mind boggling IMO.
Companies also take advantage of the infrastructure that taxes pay for. As an example, what if FedEx/UPS didn't have to pay corporate taxes even though they heavily use public highways?
In my opinion, companies should pay taxes but there is room for debate as to what percentage they should be forced to pay.
>As an example, what if FedEx/UPS didn't have to pay corporate taxes even though they heavily use public highways?
If this is your concern then the simple solution is to fund public highways with fuel taxes. (This theoretically allows taxpayers to "cheat" by buying more fuel efficient vehicles, but I think we can live with that incentive structure.)
The question is, do they use these services proportionally to their corporate income or even over-proportionally, as often implemented by progressive taxation? Considering that they make money by advertising, I bet the infrastructure use is heavily sub-proportional.
In my personal opinion, the money does more good in Google's hands than in the government's hands.
Ok then: in my opinion my money is better in my hands, but I have a hard time convincing the IRS. My wife and my family agree with me too, by the way. Who is going to pay for the roads and the military and the......
Corporations can't hold on to money forever: at some point it goes to actual people. For the sake of argument, without saying whether it's a good idea or not, you could make a revenue-neutral elimination of corporate tax by raising taxes on people.
I'm not an economist, so this is layman speculation, but it seems that taxing corporate money would encourage the company to re-invest it more quickly. Some have said that reducing corporate taxes (and increasing taxes on money when it actually goes to people) would provide more money to create jobs/grow the business. Wouldn't there also be a reduced incentive re-invest the money?
Taxing it would mean they had less of it to spend. They might spend it depending on tax breaks, but that might skew incentives in terms of forcing companies to spend the money on something for themselves rather than see it disappear in taxes. That something might not be the best investment though.
The difference being that Google is not going by opinion, but rather by law. Not saying I like what Google is doing (or like that they can), but if you want Google's behavior to change, the only route is likely going to be to change the law.
"The corporate income tax makes no sense whatsoever," said Robert Frank, a professor at Cornell. "We don't want to prevent Microsoft and General Motors ... from investing more and improving their product line," Baker said. "That's a good thing in my view."
Our economists said if you want to tax rich people as public policy, then tax rich people — tax the people who own corporations. But taxing the corporation itself is taxing the thing that really does create jobs.
In my personal opinion, the money does more good in Google's hands than in the government's hands.