Kevin Drum suggests (modestly or “modestly”) that “everyone” should love the idea of trading the corporate income tax for carbon and financial transactions taxes. I should just have a chuckle and leave it at that, but then again I get emails from the Tax Foundation that are remarkably lacking in irony. Ezra Klein is happy with his policy-wonk hat on, but thinks there’s a political problem of giving fat cats an obvious break. I argue that the problem is not just political. Drum’s at least semi-serious claim is that taxing corporate income is bad because doing so is a drag on business and ends up getting paid by individuals anyway. Neither necessarily militates against corporate income taxation in the real world.
Whether a “drag” on business or some other tax distortion that reduces private-sector activity (other things equal) is good or bad, on net, depends on the use to which the tax revenues are put. In a world such as ours where public expenditures serve as public capital and intermediate goods in addition to government consumption, it’s straightforward to write a model where distortionary taxes are optimally set at non-zero levels. (I once assisted the late Mancur Olson in doing so.) These models do not even have to appeal to left-leaning aspects of reality such as the economic efficiency of negative-sum redistribution when marginal utility is declining and income and wealth are (very) unequally distributed. So even if Drum’s switch is revenue-neutral and doesn’t stiff the government as such, it may still be improved upon — maybe not from the Tax Foundation’s perspective — by adding the distortionary tax on top of the efficiency-improving Pigovian taxes and spending the proceeds wisely. Moreover, while we’re in tax policy fantasyland, the corporate income tax could be made more efficient without necessarily reducing its revenues by way of reforms that broaden its base and reduce the statutory marginal rates.
Second, merely noting the ultimate incidence of the corporate tax on individuals fails to consider significant issues of which individuals end up paying the tax. Certainly, the tax may be passed onto individuals in part in their role as customers of businesses subject to the tax, but it will also fall on individuals as shareholders in the businesses to the extent the tax can’t be passed through. Since shareholdings remain highly concentrated among the rich, this creates equity issues center-left wonks like Drum and Klein should be happy to entertain.
Moreover, eliminating taxation on corporate income would tend to have knock-on effects making the individual income tax system less efficient. When tax system complexities create categories of income with preferential tax treatment, it creates opportunities for people who can choose how to realize their income to take their income in the low-taxed form. This narrows the tax base and requires higher (and less efficient) rates to produce a given level of revenue. In this case, untaxed corporate income gives retained earnings an indefinite tax deferral, so the incentive is to convert income from shareholdings such as dividends into unrealized capital gains (which also are tax-deferred).
The argument remains that making fat cats fatter is a small price to save for saving the planet for everybody else. I can almost swallow that, but note that much of the noise over reforms seem to be geared towards masking the fact that people with ownership in existing corporations have as much or more to lose from climate and financial catastrophes than the rest of us suckers.
Marginal Utility 