The Grand Tax Illusion Font Size:
By Tim Worstall
You will have seen, around and about, a lot being said about how the current recovery just isn't feeding through to the average man and woman out there. Wages don't seem to be rising; in fact, Paul Krugman recently made the astonishing claim that they haven't risen for the average man, per hour, since 1973. Rather than rootling around in Census Bureau data to show the inanity of this claim (largely because neither you nor I desire a simple rehash of something I wrote here back in January) I thought I'd try and offer something constructive. A solution if you wish, offered with humility.
Let us put ourselves into the position of those complaining. Wages should rise -- a noble goal. How, exactly, are we to achieve this? By what mechanism are we going to reshuffle the current distribution of income so that more flows into the moth-eaten wallets of the hardworking US citizens? Simple:
Abolish the Corporate Income Tax.
I know, I know, you're aghast at the idea that corporations won't be paying their fair share, that somehow they'll be getting away with something. In fact, they'll be getting away with precisely nothing. For, you see, corporations don't actually pay taxes. Only people pay taxes. This is an idea called "tax incidence". It means that people we think aren't being taxed are in fact coughing up the dough demanded by a specific impost.
Think of it this way. The money withheld from your paycheck for FICA and income taxes is in fact paid over to the IRS by the corporation that cuts your very paycheck, is it not? But no one thinks that it is the corporation actually paying those taxes, despite their name being on said check. Things become a little greyer with the corporations's own FICA payments for the joy and pleasure of employing you. Whether all of this comes from lower wages paid to you or whether at least some of it (but definitely not all of it) comes from the profits of the company depends on a few inelasticities which we'll not trouble ourselves to go into right now.
Yet we have established at least one point: whose name is on the check paying the taxes does not necessarily coincide with who is actually paying the taxes, yes? In the case of the corporate income tax we've also just been told who it is that really pays it and no, it isn't the company. Some of it is paid by the investors in the company, in the form of lower dividends or returns on their investment. But as a working paper from the Congressional Budget Office tells us:
"Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax."
Now I do hope I don't have to point out that the CBO is in fact non-partisan, that they are the closest we get to an informed and non-ideologically driven examination of such matters?
There are other very good reasons for abolishing the corporate income tax, as this piece from Jane Galt a few years ago reminds us. One of the best is that it is hugely expensive to actually collect:
"The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants.
This labor is unproductive. It adds no new wealth to the economy; we are paying people simply to transfer money from one place to another, a net economic loss."
There are many alternative ideas about how we should best tax investment returns but the idea of abolshing this specific tax in order to stick it to the tax lawyers and accountants has its features, does it not? Plus, of course, we would be lifting a burden from the backs of the working people, for as our CBO report tells us, they in fact pay 70% of the tax through their receipt of lower wages.
As Wikipedia tells us, the corporate income tax is expected to raise $220.3 billion in fiscal year 2006. Abolition would mean that some $154 billion, 70% of that sum, would feed back in higher wages to the very working stiffs we all claim to be fighting for. Wouldn't that be wonderful? Given that this one tax raises some 10.1% of the federal budget, we would, by making this cut, in fact be returning 7% or so of that budget to precisely the group that our Democratic friends wish to aid: the workers.
It's extraordinarily difficult to see any one other thing in either the expenditure or revenue accounts of the federal budget that would in fact have an impact of anywhere near this sort of magnitude. So no doubt we'll be able to get them all on board to aid in taking this simple and obvious step? What's that? I'm insanely optimistic? Yes, I suppose I am, expecting anyone to be thinking about economic facts just two months before an election.
One final thought, there will be those who wonder how I would fill the revenue gap. No, I'll not make claims about the Laffer Curve, or increased dynamism, nor identify specific programs that should be cut, for after all, it is only 10% of federal revenue.
As O'Rourke's Law of Circumcision points out, you can take 10% off the top of absolutely anything.
tcsdaily.com
The downside of this idea is mentioned at the end of the article. The drop in revenue when we already have deficits. While a 10% cut in spending is certainly possible without any horrible consequences, it would politically be very difficult, and I can't see Bush or the current congress, or any likely government in the next few years doing it.
Of course the cut wouldn't really have to be 10%. Higher wages would mean higher taxes on those wages. And higher earnings from the money that doesn't go to wages would likely result in more capital gains and more dividends. If the corporate income tax is eliminated than I think we should go back to full taxing of dividends, which would also add revenue. Also the cut would likely help economic growth but the effect would be small if you have to borrow to cover spending that used to be covered by these taxes. All in all I think the revenue reduction would be much less than 10% but there would be likely a real reduction, esp. for the first few years.
One benefit of the move is that it would make American companies more competitive and would likely help our trade balance. |
