Thursday, September 27, 2012

Should we tax corporate profits?

Biden: "America, I promise you this - I will not be out-gaffed by Mitt Romney. Mark my words." 

"Corporations are people, my friend" is a line that will go down in infamy no matter how Republican presidential candidate Mitt Romney's campaign turns out. People will remember it. But, here is the funny thing, he was right. Or more of, his point behind poor phrasing was right. The next few lines were: "Everything corporations earn ultimately goes to the people. Where do you think it goes? Whose pockets? Whose pockets? People's pockets. Human beings, my friend."

This much is true. Everything does end up in people's pockets. Its just a matter of whose. Economists, on both sides of the political aisle, will be the first to admit that the incidence of the tax on corporations is unclear at best. One study found that it hits executive bonuses the most and therefore the rich the most. While another study found the exact opposite, that it prevents jobs from being created and prevented raises for the employees; therefore it affects the middle class families the most. So, really no one is quite sure who is being adversely affected by this tax.

Corporations, before tax deductions, pay a corporate rate of 35%. For many industries, the real rate is much lower than that after getting credits, rebates, rollovers, etc. Matt Yglesias puts it, "Only suckers pay that rate." After the profits, the company can then pay out the profit to shareholders - who are then taxed a second time at a long-term investment tax  rate of 15% for most of these holdings. There is also a short term investment rate, which is higher, but falls on a much smaller percentage of financial holdings. This income is therefore taxed twice at two different levels.

Double the taxes. Double the fun. Double mint gum.

Taxes should be Pigouvian: Tax things we dislike. But why tax corporate profits? Profits, in themselves, are good. It shows that businesses are succeeding.

This is the essence of the debate happening right now between economists. Not if we are taxing corporations and long term investment at too low of a rate, but if we are taxing them at too high of a rate. Should we be taxing corporate profits at all?

The idea goes: We should eliminate corporate taxes entirely. Let corporations spend the money as they wish - if it is to pay larger bonuses, hire more workers, or increase salaries of the mid level worker. At the same time we make our individual tax more progressive. Tax all forms of income under the income tax, not just wage income. As is currently the case.

The highest bracket, which applies to fewer and fewer people, should be 50%+ instead of merely 35%. Call the highest bracket the millionaires' tax for those who have annual incomes greater than a million dollars. This way, the money is still collected as tax revenue if it is paid out in large bonuses to the executives (just through a different mechanism), but it does not adversely affect middle income families.

Good idea or bad idea?

Opponents of the idea quote uncontrolled corporate power. I don't find this argument terribly appealing. Then again, the research shows that more regressive the tax code is, more progressive the benefit system tends to be.

The bad news is that we are about to experience a global bacon shortage.


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