I've made the argument (here, and in my scholarly writing, and in my classes) that thepredominant 'mainstream' economic view of taxation is problematic because it focuses only on the rather restricted economic idea of efficiency. It disregards the most important exogenous issue for taxation, which is fairness. And it is problematic, because while economic efficiency looks good on paper--especially when written out in analyses that use statistics and calculus to make simple conclusions look like mathematical and scientific certainties--efficiency theories simply can't do what some suggest they should be able to do. They can't resolve the fundamental questions about tax policy. In part, it's because people don't make decisions the way most economic theories treat them as making decisions. We are not "rational wealthy maximizers" who place economic advancement above all else and self-benefit above all other ideals. And in part, it's because the theories themselves are too burdened with assumptions that are not sustainable in considering the real world.
When we consider the question of whether corporations should be taxed, efficiency analysis seems to look at two small a piece of the picture. Scholars write about the incidence of tax--is it on shareholders, consumers, creditors, workers? Not clear. But economic theorists tend to think only people should (or can) pay tax and therefore corporate tax is bad--better to tax the investors (as we do in partnerships or S corporations or other pass-throughs) and eliminate the corporate tax.
I've argued that the question of taxation of corporations can't be considered without thinking about the issues I've raised on this blog--how do we tax fairly? and how do we create a tax policy that helps to sustain democratic egalitarianism? We want a policy that values democratic institutions, respect for individuals, and the idea that a democratic society should provide opportunities for all. Corporations are not people, but the corporate entity, through the people who manage it and own it, nonetheless wields enormous global power and seeks self-preservation (at all costs?), much like live animals do. Corporations are not people, but if they are permitted to grow without restrictions and to make decisions about how their products will be made, shipped, and provided without restrictions, they will tend to make "wealth maximization" decisions that benefit their owners and managers to the detriment of their workers, customers, and even in many cases of grotesque environmental pollution, the future of the planet. We might even argue that the decision years ago to treat corporations as "persons" under the Constitution, and to give them "rights" under the law separate from their managers and workers and owners, created a necessity to tax them. Taxation of corporations ensures (or should, if the IRS audits them appropriately) that the endeavors the corporations engage in contribute to the federal fisc; and it also restrains, somewhat, the ability of corporations to grow out of proportion to what is reasonable for a sustainable democracy (somewhat like the estate tax restrains, somewhat, the ability of wealth to accumulate).
There's a posting at the Angry Bear on this topic that readers of this blog may find interesting: The Cactus Tax Proposal, Part 3: Corporate Tax Rates. I encourage you to read the series. This is an important topic, and I'm curious what readers think. Have corporations acquired so much power that we can't tax them successfully any longer? They certainly use the "tax competition" gambit as strongly as possible, getting countries to impose a corporate tax (and then use it to build roads, utilites for the corporation) so that they can reduce their US tax liability with Mellon's foreign tax credit while actually still enjoying the benefit of the consumption of all of the amount purportedly paid in taxes to the foreign government.
I start out dubious of the ability to capture the appropriate level of tax if we let large multi-national corporations pay no tax and only attempt to tax what is passed through to shareholders. I end up thinking about the many reasons that it seems appropriate to tax corporations--even though they are "merely" entities that are run by people, and even though they are "ultimately" owned by people-- and concluding that it is essential to do so. What about you?
Here are some interesting links on the subject:
- Joel Friedman, CBPP, The Decline of Corporate Income Tax Revenues, Oct. 24, 2003: corporate tax 2003 (noting that corporate taxes raised about 5% of GDP in 1950 and even until 1968 were the second greatest source of funds for the federal fisc, but since that time corporations have effectively lobbied for corporate welfare provisions in the code, resulting in (at the time of the report) corporate taxes raising less than 10% of federal revenuesThe D, much less than the payroll tax, and in 2003 amounting to only 1.2% of GDP;
- Bob McIntyre, CTJ, Corporate Tax Avoidance in the States Even Worse than Federal. Feb. 2, 2005 (in a study of 252 companies, finding that 71% had managed to pay no state income taxes at all, and most had slashed their state income tax payments with various tax avoidance planning; this include huge companies like ToysRUs, Merrill Lynch, and AT&T that paid not one penny of state tax over the three-year period of the study);
- Dharmapala & Desai, Earnings Management and Corporate Tax Shelters, Feb. 2006 (considers the implications of the link between corporate tax avoidance and earnings management);
- FinFacts Team, Corporate Tax Competition has negative effect on income tax revenue, Apr. 22, 2008 (an interesting European study that finds that while corporate tax revenues may go up when corporate tax rates are cut under the pressure from countries competing for corporate patronage, the overall income tax revenues go down--that's because entities are switching to corproate form when it is ultimately more advantageous than noncorporate form through the tax competition gains)
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