Saturday, April 20, 2013

Eliminate the Corporate Income Tax

It’s been a few weeks since I posted here, for a variety of personal reasons.  It’s hard to get back into harness again after a pause.  I thought about writing about the potential long run economic benefits of crowding out private investment, but that’s complicated and I’m tired.  I thought about writing about the worldwide Excel Depression, but that’s been covered exhaustively by others, and I have nothing exceptional to say about it.  I thought about writing about the chained-CPI controversy, and I probably will soon in an effort to get my fellow progressives to mellow out about it a bit.  But I’m taking the easy way out: I’m transferring a discussion on corporate income taxes from email to here.
A few days ago my brother in law Craig sent the text of an opinion piece in the New York Times by James Livingston to me and my nephew Dan, wondering what we thought of it as economists.  Livingston’s point is that since corporations have now, by Supreme Court edict, been promoted from having some of the legal rights of human beings to having all of them, to being almost embedded in living flesh, then they should pay the personal income tax rates too.  He points out that the share of federal revenues paid by corporations has fallen from about a third in the nineteen-fifties to about 9 percent now, and so that seems like a good place to look for new revenues that we clearly need to reduce our deficits in the future.
But, economically speaking, I’m uncomfortable with all of this.  My response to Craig’s question (why shouldn’t corporate incomes be taxed like personal incomes, since the Supreme Court and Mitt Romney say they are people) was this: 
Well, because corporations are not people.  They are legal fictions created by the states.  That's why I didn't support Citizens United, and that's why I don't think corporations should pay any income tax at all.  (That doesn't mean they should pay no taxes---they should be the collectors of Pigovian taxes for us, because there isn't any more efficient way to collect them.  And they should also be the recipients of Pigovian subsidies...)”
To which he responded that he thought Pigovians were characters in Angry Birds.  And he very reasonably questioned the ability of the state to calculate a correct level of Pigovian taxes.  
I was too brief in my response to him, so let me be a bit more complete.  Corporations should pay taxes that internalize the full cost of creating the products they sell.  Pigovian taxes account for externalities.  For example, a carbon tax helps increase incentives to find less carbon-intensive processes and products.  But corporations should also pay user fees or excise taxes for the public goods they directly use up as inputs to their business efforts (such as gas taxes to pay for maintenance of the roads they use to deliver goods to market).  And I’m sure that’s not a complete list of taxes they should pay.  But they shouldn’t pay income taxes because strictly speaking, as non-persons, they don’t have personal income.  Their revenues pay their workers or buy equipment or inputs, and their profits belong to their shareholders and creditors. 
My primary objection to corporate income or profits taxes in general is that they are just a pass-through.  Real people, not legally constructed fictional people, pay all taxes in the end.  It might feel as though raising revenues through taxes on corporate profits would reduce the need to tax personal income, but it doesn’t.  It just changes the way those taxes are collected. The corporation's customers, or workers, or owners will pay corporate taxes in higher prices, lower wages, or reduced dividends, or in some other way.   And by applying income taxes at the corporate level we are allowing the corporate managers to decide who will pay them.  Corporate managers are unlikely to distribute the tax burden in any very equitable way, or in any progressive way.  They’re more likely to try to shield their owners, and collect the tax from someone else.
I appreciated Craig’s point about the limits to information available to any central authority; in a perfect Hayekian world prices would supply all the communication required for local actors to act in globally optimal ways.  Consumers don't need to know the details of how the product is made, or what resources are used in producing it.  They (and only they) know how much they will benefit from purchasing a product.  If the product’s price reflects the cost to strangers in distant places of creating and transporting it, then the consumer’s choice about how much of the product to purchase at the market price achieves a cost/benefit optimization that no central authority could possibly have enough information to solve analytically.  And producers also know how much to produce; producers of rolled steel don’t have to know the details of every household’s personal consumption choices to know how much they can profitably produce at the price the market will pay.  
But the Pigovian criticism is that there are some situation, such as, for example, pollution leading to global warming, where prices don't fully provide that information, because producers are not required to pay for costs (or can’t capture benefits) external to their own direct transactions. Just because it's difficult for a central authority to gather information to estimate that external cost doesn't mean it shouldn't try, because the long run cost of ignoring global warming could be catastrophic.  And public fees or excise taxes can be used to make companies reflect the cost of providing public goods that truly are inputs to the creation and delivery of their products.  
So I don’t mean that corporations should not pay taxes.  They should pay taxes to make prices provide better information about the costs of productions, and those may be substantial.  These taxes should not be applied to raise revenue, exactly, although we can certainly use the revenue they produce.  They are applied to make sure that the price system functions well, and provides both consumers and producers with the real and complete information they need to make globally optimal private decisions about what and how much to consume, and what and how much to produce.
But corporate income taxes don’t improve local decisions; they just increase the cost of doing business, and reduce the incentive to produce, without providing either corporations or customers with any improvement in their ability to make good choices.  
I didn't make this idea up.  I've forgotten where I first ran across it long ago, but I found it convincing then, and I still do.  It’s a bit lonely, though.  I don’t see a lot of calls for the elimination of corporate income taxes in the econoblogosphere.  Even the conservative blogs seem to call for the reduction of corporate income taxes, not their elimination.   But until someone explains where the flaw is in the argument above, I still say, as a progressive: eliminate the corporate income tax.  We should demand that our elected representatives decide which real flesh-and-blood people should ultimately pay for the cost of providing government investments, services, and protections, rather than ceding that power to corporations animated by the profit motive.  And we should be wary of actions that reduce the incentive to produce, to create, and to hire without providing any corresponding good economic effect, particularly when the result may be a distribution of the tax burden that is likely to be less progressive, and will certainly be no smaller.

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