Thursday, January 26, 2017

Corporate Tax

My view: the corporate tax should be zero. Not just a zero rate, but the tax should be abolished. Lowering a rate is just an invitation to renegotiation, and a quick raise when the next party takes over. Lowering a rate keeps all the lobbyists around to keep all the exemptions going. To reduce a tax, you must follow the advice of a zombie movie -- kill it, and drive a stake through its heart. Burn the code, delete it from the hard drive.

In my best guess, the tax is entirely really paid by consumers in higher prices and workers in lower wages. However, it works best only with a shift to a consumption tax (progressive if you wish) on individuals.

In the news, Marginal Revoultion has a short piece on eliminating the corporate tax, linking to Utah Senator  Mike Lee and to Matt Yglesias, Scrap the Corporate Income Tax. When I agree with Matt on something, a rare event, I like to celebrate. Matt:
"Closing loopholes while lowering rates would still leave the basic structure in place, with well-connected companies ferociously lobbying for their tax breaks. We need something much bigger and tougher that corporate income tax reform: an alternative source of revenue that will let us do away with the corporate income tax entirely. 
.. Just give up. Though the corporate income tax as presently constructed supports a small army of accountants, tax lawyers, lobbyists, and CNBC talking heads, it doesn’t raise very much revenue.
Rather than trying to mend the tax, we ought to end it and replace it with something else.
Pick who or what we want to tax, and tax it deliberately."
Lee writes
"..what would a tax system that puts American workers first look like? It would start with a cut in the federal corporate tax rate. Not to 25 percent or 15 percent, but to zero. Eliminate it altogether."
Issue 1 Incidence 

What, shouldn't corporations "pay their fair share?" As both authors recognize, corporations bear no tax burden. Every cent of corporate tax comes from people -- from higher prices for products, lower wages for workers, or lower profits for investors. A corporation is just a shell, money goes in and money goes out.

The difference between who pays a tax and who bears the burden of taxation is one of the nicest lessons of econ 101. The clearest example is sales tax. Stores "pay" the sales tax, but it's clear to every shopper that they "bear the burden" -- that prices would be exactly that much lower without the tax. (This may not be true or exactly true, but it's a good example nonetheless as people see it that way.) But if a sales tax is passed on completely in higher prices, and is thus borne by consumers, the same principle applies to corporate taxes as well.

So who bears the burden of the corporate tax -- consumers (higher prices), workers (lower wages), or investors (lower profits?)

I agree with Matt (again!)
Who ultimately pays those corporate income taxes? This is a fascinating question in the economics literature, and a bit of a black box, with nobody quite sure who’s paying or why
Lee explains
It may seem ironic that a populist, pro-worker tax reform could begin with what sounds like a handout to corporations. But it’s true. Remember, the corporate tax is not assessed on some villainous collection of “Wall Street fat cats.” ... The corporate income tax takes money that would otherwise be some combination of investors’ dividends and workers’ wages. [JC: and consumer's lower prices.]
Economists differ on the precise ratio, but the consensus is that lost wages make up between one-quarter and one-half of corporate tax revenue. (According to one recent study, it may be even more.) But whatever the proportion, we know that eliminating the corporate tax would immediately liberate every penny of American workers’ share of it, and in short order boost take-home pay in every industry across the country
Lee links to Major Surgery Needed: A Call for Structural Reform of the U.S. Corporate Income Tax
by Eric Toder and Alan D. Viard, who find workers bear 50% of the corporate tax,  and Corporate Tax Burden on Labor: Theory and Empirical Evidence by Aparna Mathur and Matt Jensen, interesting papers on the subject.

The principle is pretty straightforward, and I think points to the major mistake in current thinking. Who bears a tax? He or she that cannot get out of the way! (The inelastic demand in econospeak.)

Consumers? If US corporations face, say, strong competition from non-corporate business or foreign corporations on prices, they won't be able to raise prices to pay the tax. But don't confuse an individual firm's ability to raise prices with the whole industry. When all businesses must pay tax, and all privately held businesses must pay a coordinated income tax, and they have to pay it on all goods, there really is nowhere else to go. You can buy less overall and enjoy free things instead -- walks in the park -- but that's about it. So it's a good bet that much corporate tax is paid by consumers in the form of higher prices, just like sales and VAT taxes.

Workers? If companies lower wages overall, permanently, how much less do people work? Not a lot, actually. Poorer people work harder, but given income, people work less for a lower wage. These "income" and "substitution" effects largely offset, so at first pass, the amount of labor overall does not change or if anything slightly increases with lower wages overall. So, lower wages can be passed on.

Capital? The widespread presumption is that the corporate "profits" tax results in lower profits, and thus is borne by Mr. Toppam Hat. I think much of this is a sunk cost fallacy.

Suppose we institute a 35% corporate tax, and suppose corporations as a whole cannot raise prices or lower wages, and they do not shrink in size. Then dividends go down 35%. The stock price goes down 35%. The initial owners of the company lost the entire present value of the corporate tax. But after that, anyone who buys a stock for 35% lower price, getting 35% lower dividends gets exactly the same return going forward. Fast forward 50 years or so, and the current owners are bearing no burden of taxation whatsoever.

You can see the key assumption I made -- that the rate of return new investors demand does not change (just like the assumption prices can't change or wages can't change, which would insulate consumers or workers from bearing the tax). But of all the can't changes, that seems the most reasonable. In a global capital market, trying to get people to give you savings at a lower rate of return is a lot harder than trying to get them to pay more for products or work for lower wages.

Furthermore, there is another avenue out: Save less. If indeed new capital is bearing the burden, people save less. Firms become smaller, to the point that the marginal product of capital equals the old rate of return plus the corporate tax. Then once again consumers and workers are bearing the entire tax, even though no prices have changed. They just get less products and less work. This is the intuition why the optimal tax rates on rates of return is zero, which is the reason for a consumption tax.

One piece of evidence, I see no difference in average return on stocks or interest rates on corporate bonds through wide variation in corporate tax rates. I also don't know of evidence for big stock price declines when corporate tax rates are introduced. The former suggests the rate of return is the same, and corporate taxation does not therefore get paid by investors. The latter suggests that it is coming out of prices or wages, not dividends in the first place.

So, econ 101 first principles suggest to me that most of the corporate tax is borne by consumers and workers, not by current owners.

We want "science" to guide public policy. If the fact that who pays the tax and who bears the tax cannot be explained and acted on in our public forums, we really are in trouble.

From Toder and Viard I learned an interesting tidbit:
When it comes to the corporate income tax (CIT), there is no standard assumption that is uniformly applied by those agencies [Congressional Budget Office, Treasury, and the Joint Committee on Taxation]. ...economic incidence is not obvious. While the CBO and Treasury have historically assumed that the CIT is borne by owners of capital, the JCT is wary of assigning incidence to any particular group of individuals..... their distribution tables ignore the incidence of the CIT altogether,
We live in an era of great attention on "facts" and "alternative facts" and "science." Every tax reform is followed by agonizing detail of "facts" on just who gains and who loses down to the last $10 -- with essentially no attention to incentives, the economists laments. But those calculations are seldom transparent, they're just big black boxes. Now, one look in to one black box, we find out that distributional effects of corporate tax cuts are basically made up by arbitrary assumption. 

Issue 2 Replacement

Matt describes high taxes on dividends, but not with any spirit or detail. I prefer a simple consumption tax, for reasons I'll get to in a minute.

Lee  wants to make up the difference with higher investment income taxes rather than a progressive consumption tax
lost revenue could be recouped, at least in part, by raising the tax rates on capital gains and dividends.
Though he points out that even 39.6% Federal income tax is less than the current 50% --"35 percent corporate tax rate, 20 percent rate on capital gains and dividends, and the 3.8 percent Medicare surtax," it's still 39.6% too much (plus state taxes). More later.

I prefer a simple consumption tax, with no income tax at all. It's almost necessary to do this. The corporate income tax is, in a way, one more side effect of the mistake of trying to tax income rather than consumption in the first place.

If we have no corporate income tax, then people rush to incorporate themselves, pay no taxes on the incomes of their corporations, and only take out dividends as personal income when they need to buy something. That's why we have a corporate rate roughly the same as the top personal rate.

The corporate tax comes, I think, from fundamental misconceptions. The first is that corporations are somehow like people, who when taxed bear some burden. No, corporations are just shells or buckets of money, people pouring money in or taking it out bear the entire burden. Second, is that profit is somehow different from the electric bill, wages, or debt. The latter are costs of dong business, the former is a benefit which bears a burden when taxed. I think people have in mind a business completely owned by a person, the business was started long ago, and the person lives on the profit stream. Downton Abbey, say. The error is that businesses need capital just as they need labor and electricity. Profits, paid to capital are a cost of doing business no less than wages or the electric bill. Seen that way, taxing profit is no different conceptually than taxing wage payments, interest payments, or the electric bill.

A lot of the difficulty of lower corporate income taxation revolves around what to do with retained earnings, profits the company makes but does not pay out and instead reinvesting them in the firm. Now we get fancy with investment tax credits, and depreciation schedules, and so forth. You see that   Rube Goldberg complexity springing up in Mathur and Jensen, given their statement at the beginning that they didn't want to consider also scrapping the personal income tax. Matt and Lee both want high taxes on dividends and capital gains for the same reason -- though taxing dividends and capital gains is a terrible idea because it taxes rates of return. It also will involve more 401(k), 526(b) and other complex devices to get around the obviously bad idea of taxing rates of return.

No corporate tax, a large consumption tax, no tax on rates of return, fit well together. (No corporate and estate tax also means "non-profit" ceases to mean much. That would be very healthy -- profit vs. nonprofit could relate to the actual organization mission, not exploiting tax laws.)

One easy way to move towards a progressive consumption tax by the way would just be to remove all limits in IRA, 401(k), etc. I think the ideal is a uniform VAT -- with eliminating corporate, income, and estate taxes -- plus on-budget transfers for progressivity.

Issue 3 Border adjustment

The corporate tax reform question has gotten mixed up with the border adjustment issue. Several readers have asked for my opinion. I have to admit I'm confused. Feldstein likes it Summers hates it. If sold as a VAT, which is border adjusted it makes sense. But it's not a VAT -- wouldn't apply to non-corporate business and, I hope dearly, not to direct imports and services. When I read some of the other blogs it seems like a complex mess ripe for exploitation by clever tax lawyers. Perhaps it's not as bad as a uniform tariff (not much could be worse), but that's weak praise.

Anyway, I've spent a day or so trying to figure it out, and can't get to solid ground. That by itself seems an important weakness. I'm not the smartest person on earth, but I am a reasonably trained economist, and I have put a day into figuring this out. Tax reform ought to be really simple, and transparent to the American people, if for nothing else to put out the smoldering fire that people feel the system is rigged and fancy people with fancy lawyers are getting away with murder.

Most of all, if now is not the time to really do it right, when is? This is surely the one time in most of our lifetimes for a comprehensive, massive simplification of the tax code.


  1. It may have merit, but assuming that price is largely a function of competition not taxes, the taxes saved may simply go into profits and not price reductions. With a vat type tax, worker get hit twice.

    1. This seems a little silly, as pass-through goes both ways--in this case, that the reverse (an increase in the corp tax) also would not be passed through.

    2. This was my thought as well. Companies charge as much as they can get away with. Companies pay as little as they can get away with. They will make as much profit as they can.

      The idea that companies will pass on savings to consumers and staff is fanciful. It is called trickle down economics and has been shown to not work.

  2. Great thoughts as usual. I agree that this all suggests we should move to a consumption tax.

    I note, however, things are not quite as easy as "One easy way to implement a progressive consumption tax by the way would just be to remove all limits in IRA, 401(k), etc." You will still have the problem that people will try to categorize spending as investment rather than income whenever they can to avoid tax.

    One simple example: what tax is collected when a business pays for its employees lunch? Ideally the answer should be more than $0 given there is some significant consumption occurring (literally!).

    I think a move to a consumed income tax probably results in some significant simplification, but less than most people realize when first considering the idea. I think such a move would be a good idea, mainly because we could at least avoid all the Rube Goldberg contortions of the current system.

    1. Yes, a VAT in exchange for no other Federal tax is simpler for just this reason. But some people want to keep progressivity through the current tax system. That's better than nothing, but yes then the accounting gets harder.

    2. Doesn't the current system have progressivity only within the lower approximately 99 percent? Higher incomes avoid taxation. A VAT should, if implemented sanely, bring the top 1% into taxation. And progressivity, or more importantly its purpose, could readily be achieved by reduced tax rates for "essentials" like fish&chips&beer, and higher rates for "luxuries" like personal cruise ships.
      (lower rate for non-motorized aircraft, though, please)

    3. Good point Echo Five! President Trump is a good case. Under a consumption or VAT, he would likely have paid a lot more tax than under an income tax, since he (legally) used real estate losses to avoid paying income tax. If he had pad VAT on houses, yachts, etc., he likely would have paid more tax in the end.

    4. This isn't a question that needs a novel answer - lots of countries have a VAT and the ways they work are reasonably clear. One of the things many economists dislike is reduced tax rates for "essentials" - because you just invented a big new bureaucracy. Surely we can introduce progressivity across the tax and transfer system without needing to make the VAT itself progressive?

    5. Ideally we would have no need for progressivity. Ideally income would be distributed with a reasonable degree of inequality. And that would suffice. The lowest paid would pay their reasonable contribution to the collective treasury, by means of VAT, and so also would the higher paid.
      So how can we approach ideality? Clearly the latest few decades the movement has been in the wrong direction i.e. grossly increasing inequity. And back when unions were making gains pensioners/retirees and many non-union workers were losing out.
      A discussion of how to achieve reasonable income distribution might be worthwhile.

  3. Assume that we wake up tomorrow and observe that corporation tax does not exist anymore. How does this result in a raise in workers wages? Are you assuming a negotiation power for workers? Otherwise, what can inhibit the shareholders from holding the added profit for themselves? If they could hire workers at the current wages, what does change?

    Empirically, one can measure the increase in share value after a tax cut in a simple event study. I would guess the added value should be somewhat close to total profits * the tax cut.

    1. Mehdl,

      "How does this result in a raise in workers wages?"

      It's quite simple really. A corporation without legal standing cannot seek remedy through the courts in the event of a strike by labor.

    2. Actually the main mistake in much analysis is to jump to bargaining and not think about markets. With no corporate tax, the immediate result is yes, higher profits. But higher profits draw in more capital, and more investment. Businesses expand. When expanding, they hire more workers and compete to sell more products. That's what drives down prices and up wages, until the profits are back to normal.

    3. John,

      "But higher profits draw in more capital, and more investment."

      Corporate after tax profits:

      Domestic investment:

      This ratio has oscillated wildly. It's peak value was over 4.18 in 1985 and now stands at about 1.35. Meaning back in 1985, $4 were domestically invested for every $1 of corporate profit. Now about $1.35 is domestically invested for every $1.00 of profit.

    4. If demand is not flexible, lower prices does not increase demand. A person can only buy so many groceries, cars, clothes or whatever. Again the savings on taxes are used by the business owners.

      A ploy would be to consume extra income repurchasing outstanding stock. Capital goes up, but only in the Co. Stock. Issuing stock to high executives instead of cash, while repurchasing outstanding stock is a current practice sounds like it would only get worst.

    5. Any studies on the wage impact of the 86 tax reform?

    6. Attractiveness of starting a business has also changed quite a bit in that time - in terms of pernicious regulation, and potentially also in terms of business confidence (i.e. how attractive I feel starting a business is)

  4. With inequality as bad as 1929, some want to exacerbate it even more via a tax on consumption???!!!1

    Some working class Americans already pay 11% sales tax in inner cities. Should they pay a 20% federal sales tax as well?

    Why not progressively tax dividends and capital gains at the individual level. And tax high-wealth (over 50M in net wealth) as well.

    VAT? It will cause our economy to implode, and the working poor to go hungry

    1. Taxing investment is a bad idea. Consumption tax can be as progressive as you want. And, better yet, use the proceeds to send people checks, if you want.

    2. i'm sorry, i don't follow - how can "consumption tax be as progressive as you want2?

      i thought that consumption taxes were regressive because low earners suffered proportionally more. unless you're suggesting a consumption tax that increases with consumption?

    3. You can tax luxuries more than essentials. You can also include a flat rebate check to offset the sales tax for low income people.

    4. I believe the progressivity would could be achieved by rebates. You could give a flat tax rebate of say $5K. To make it more progressive, make the rebate larger. To make it less progressive, make it smaller. I suppose you could somehow calculate a floating rebate based on some input, but I think that makes things a lot more complicated (need to know how much you paid in VAT, what is your income, etc).

    5. maybe with rebates?
      Consumption tax 40% charged whenever you buy something.
      Save receipts and file them for rebates depending on your income.

      Or.. have your last years income number attached to your credit card, so it charges you the appropriate rate when you make a purchase. File for minor adjustments end of year?

      I'm sure someone can come up with something clever

  5. John,

    And I will keep repeating why there is a corporate tax. Corporations are distinct legal entities - they have liabilities, assets, responsibilities, and perks that extend beyond those of the ownership / employees of the corporation.

    "As both authors recognize, corporations bear no tax burden. Every cent of corporate tax comes from people -- from higher prices for products, lower wages for workers, or lower profits for investors. A corporation is just a shell, money goes in and money goes out."

    If a corporation is just a shell (as you say), then how are the ownership and employees of a corporation able to shield their privately held assets from liquidation if that corporation goes bankrupt?

    1. Just like climbing Everest ...... "because it's there".
      It is easier to collect tax from a corporation than from many other places because that is where there is the most concentration of flow of money.
      Collecting tax from some other flow of money (e.g. by VAT) may well take more effort, although our present mechanisation of transactions should make it much easier than in the past.
      I do think it is important to look at the possible beneficial psychological effects (e.g. incentives) of alternative schemes.

  6. John,

    "Lowering a rate keeps all the lobbyists around to keep all the exemptions going."

    B. S. Keeping tax policy in the hands of Congress keeps all of the lobbyists around. We managed to take monetary policy out of the hands of Congress about 100 years ago (Federal Reserve Act of 1913 and Banking Act of 1933). We should do the same with tax policy.

    1. I like that. The govt sets the income they wish to receive from taxation. An independent body decides what shall be taxed so as to raise that amount of income with least economic impact and distortion.

    2. PaulL,

      The government would unlikely be able to set a fixed dollar amount of tax revenue that they want to collect. They would instead need to stipulate tax revenue as a percentage of GDP (or some variation). It's not like Congress could demand a gazillion dollars of taxes on a few trillion dollars of GDP.

    3. They're politicians, they're capable of infinitely dumb things. I'd hope the voters would notice though if there elected representatives set the tax take higher than GDP.

      If you set it as a percentage of GDP, then tax take will fluctuate from year to year. Although perhaps that's a good thing - maybe that could be the ultimate balanced budget amendment. Congress sets the intended long-term tax receipts, and this new commission adjusts tax policy to average out at that over the economic cycle, and borrows/pays debt as appropriate when things are boom or bust.

  7. Just read Mike Lee's arguments here:

    "After eliminating the corporate tax, we could raise tax rates on capital gains and dividends all the way up to par with labor income (top rate today: 39.6 percent), and investors could still come out ahead, just not as much as workers will, and only if they invest in the United States."

    Which means that the owners of privately held corporations would pay 0% tax while the owners of publicly traded companies would pay 39.6%.

    And basically what would happen is that U. S. companies would no longer use the public equity markets for much financing.

    Private owners would call the payments they receive dividends or capital gains - they would simply reclassify them as wages / salary.

    1. If the owners of a private corporation reclassified their dividend income as wage income, they would be subject to income taxes, payroll taxes, etc. at both the state and federal level.

  8. "Economists differ on the precise ratio, but the consensus is that lost wages make up between one-quarter and one-half of corporate tax revenue."

    Wouldn't that mean that corporate tax acts to flatten the distribution of income in the management chain? If a lot of the incidence is on pay, then most of it would be on most of the pay which is comprised of executives and senior managers. At the ground floor employee level, a given corporation doesn't have the same power to set wages (an engineer, say, is paid about the same at most companies, a manager is paid more at bigger companies), so the incidence would be primarily on management (and relative incidence would increase at larger companies).

    This makes intuitive sense to me because I don't care about the level of corporate taxes, but the executives at our company care a lot.

    1. "an engineer, say, is paid about the same at most companies"

      this is not true--the recent literature by e.g. Card and Kline has concluded that firm pay differentials for the same job can be quite large

    2. What you say may be true for one corporation in isolation but does not make sense when the corporate tax rate is applied to all companies (which, of course, it is).

      In the simple efficient market case a company hires workers "ground floor employees" as long as the marginal benefit of employing an extra worker exceeds the wage cost until MB=wage. An increase in the corporate tax rate lowers profits, which reduces this benefit so the company will reduce its workforce until the marginal benefit is once more large enough to equal the market wage. Since all companies affected by the corporate tax do this it will reduce the equilibrium wage for workers (the channel of causation going through higher unemployment putting downward pressure on wages).

      In reality it may be the case that corporations add a markup to wages so that MB=(1+markup)*wage, perhaps because they have some market power when it comes to hiring. However the corporate tax has no effect on market power so it does not change the story set out in the above paragraph.

      As for executives caring more about the effect of corporate taxes I would guess it's because they are more directly confronted by it; their whole jobs revolve around maximizing the profits of the company.

  9. Mehdi,

    I agree. Aren't wages deducted before income taxes? In fact, couldn't companies increase wages today to the point where they make no profit and thus will not have to pay taxes? A lower tax rate just lets companies keep more earnings, not pay workers more. What am I missing?

    1. As noted in the article, if companies made no profits, they'd probably find it difficult to obtain capital. In the same way as if they paid their workers no wages, they'd probably have no workers. The suggestion in the post is that capital probably has a stronger bargaining position, and is more mobile, than workers. So the incidence of the tax is unlikely to be on capital.

  10. The most important function of government is to provide security to persons and property against enemies and criminals foreign and domestic. Everyone who is protected by a Government should contribute to defray the costs of this protection which are substantial.

    If the only persons concerned with protection of their persons and property were residents of the governed country, then it would make little difference how the funds to run the government were raised.

    But, the world is complicated. In particular, many non-resident aliens pay the United States the supreme compliment of investing their capital here. If they do it as owners of a business establishment, they will pay taxes on the capital via an income or withholding tax, subject to bilateral treaties between their sovereigns and the US.

    However, if they make their investment by buying shares in American Corporations, the only tax they pay is the tax on corporate profits.

    If the corporate income tax were abolished, foreigners could deploy capital in the US by buying corporate shares and would pay no taxes on their investment.

    A further problem is dead hands. What were called mortmain in the Middle Ages, is the ownership of income producing property by tax exempt entities such as universities and hospitals.

    If a tax exempt entity makes money by conducting a business for profit, it must pay a tax on its "Unrelated Business Taxable Income". This tax is not imposed on business conducted by taxable corporations even though they are wholly owned by a tax exempt entity. If the corporation tax were abolished, it would create a loophole in the treatment of tax exempt entities.

  11. Corporations are people, my friend!

  12. If I reverse your 35% argument (i.e., there is a 35% corp tax that gets removed), there would be a one-time windfall for current shareholders as the share price is driven up, which brings the percent dividend yield back to its long term average. I don't see how any of this would change the competitive landscape. You'd just have higher cash flows (but the same return) to capital on companies with 35% higher PE ratios. Now the government has to go elsewhere to make up for its revenue shortfall; you propose consumption tax. Workers then reduce their consumption by 35% to pay for the tax. Given that the tax is now on those with a high propensity to consume rather than on capital (and given corporate savings rates, there doesn't seem to be a shortage of capital), we end up with a smaller economy. What am I missing here?

  13. It is confusing but Auerbach has an interesting way of making it simple. Think of it as two things: (a) replacing the profits tax with a VAT tax; and (b) giving US firms a labor subsidy. Now would a labor subsidy encourage exports and discourage imports? Auerbach and Feldstein say no based on their exchange rate argument. But as I have tried to note over at Econospeak - the question then becomes what is the point? When Auerbach says it makes transfer pricing obsolete, he is quite wrong. He is looking at only the US side and not the fact that others nations such as Canada still take income at the source. Summers briefly notes this with his "tax arbitrage" argument. I have tried to explain in bite sized simple examples like my Trump Toaster Oven story.

    I agree with your position that we should make this simple and transparent. Well said!

  14. I almost agree, so long as we really do tax at progressive rates every dollar that leaves a corporation and ends up in somebody's pocket. The only way to ensure that is to have corporations audited annually to verify just that. So I would impose a very small tax---maybe 5% of the financial income the corporation reports to its shareholders and the SEC, not a separate income based on different rules for tax purposes---and that tax would be dedicated to funding the army of required auditors. Misrepresenting the income would remain tax fraud, but it would also be securities fraud for public corporations. Most importantly, we would have the dedicated funds to effectively ensure that people actually paid a progressive income tax on income from corporations.

  15. Perhaps if we can straighten out our fiscal policy, trade and investment will take of itself. Even though we import billions of dollars of goods and services, other countries buy our debt, not our goods and services. This is the real cause of our job drain. Balancing the budget but should come first. This is lost on the media.

    1. A deep truth lost on much of the Administration as well as the media. We import goods (net) because we save less than we invest. Period.

    2. Anonymous,

      "Perhaps if we can straighten out our fiscal policy, trade and investment will take of itself. Even though we import billions of dollars of goods and services, other countries buy our debt, not our goods and services."

      You have hit the nail on the head here. But realize that running balanced budgets all of the time means raising taxes and or cutting spending during a recession / downturn - something that no politician has the stomach for.

      And so the solutions are as follows:

      1. Eliminate all taxes and government prints money to fund it's expenditures. The basically eliminates independent monetary policy from the central bank.

      2. Government sells equity claims on future tax revenue to it's own tax base instead of bonds to anyone that will buy them. This has the added benefits:

      2a. Independent monetary policy is preserved because government neither prints money directly nor borrows

      2b. The realized returns on government equity would be contingent on the level of overall economic activity. During a recession, these returns would likely fall. This means that they would not put a serious drain on fiscal resources - unlike bonds that make payments no matter the economic situation.

    3. John,

      Neither cutting the corporate tax rate to 0% nor going to a consumption / VAT tax addresses this deep truth. Equity sold by the federal government would tackle it head on.

    4. Hmm. If you eliminate all taxes and print money to finance expenditures, than what is the future tax revenue to which the government is selling equity claims?

      This sounds a lot like John Law, France, 1720. It didn't work out so well.

    5. Short version of Law: print money to finance government expenditure. Said money is backed by equity claims to all the gold about to be discovered in the new French territory of Louisiana. Louisiana geology: miles of Mississippi silt.

    6. John,

      It was choose #1 or #2, not both. I apologize that I did not make that clear.

    7. That helps. Still, financing all government spending with money printing either means cutting spending back to a tiny fraction of GDP, or hyperinflation. ZImbabwe tried this most recently. Selling claims to future taxes is called.. wait for it... government debt. Selling equity claims to future taxes means selling control rights to taxation. That idea -- tax farming -- is as old as the Romans (Roman governors got the right to raise whatever taxes they could. For one year. A bad, er. "intertemporal incentive" as we call it in econospeak). French tax farms... well, ask Louis XVI how that worked out.

    8. John,

      "Selling equity claims to future taxes means selling control rights to taxation. That idea -- tax farming -- is as old as the Romans."

      Equity has many connotations. What I am talking about is equity where the returns are realized in filing a tax return. You (as owner of equity) would only have a claim to your own taxes (not everyone else's).

      For instance, U. S. government sells you $1000 in equity with a 5% one year return. Meaning your equity is worth $1050 in one year. The only way to redeem that equity is to pay your taxes with it. Contrast that with a 5% one year government bond where you get paid back no matter the economic situation.

    9. And there are some other benefits.

      Under the Constitution, the Legislature (Congress) has the sole ability to spend money, borrow money, and / or print or coin money.

      The sale of equity could be handled entirely by the Executive branch of government. U. S. Treasury (part of Executive Branch) sells equity. The Internal Revenue Service (part of Executive Branch) redeems equity.

      Congress has no say.

    10. Any thoughts?

      Is this deep truth lost / not lost on Trump's economic team (Mnuchin, Hassett, Kudlow)?

    11. I would call it a discount on prepaid taxes.
      Would that be correct?

    12. Anonymous (E5),

      Yes, that is exactly what it would be. It has the advantage of reducing the federal debt regardless of the fiscal stance of the Congress (surplus, neutral, deficit) and it places changes in tax policy with regard to the business cycle outside the realm of Congressional lobbying (similar to the Federal Reserve and monetary policy).

      These are both things that John and I agree upon, but we can't seem to come to an agreement on how to reach those goals.

    13. Discount on prepaid taxes sounds a lot like voluntary Keynes. At least the Keynes that was explained to me. Where in a recession the government borrows, and spends, money from people who have it but aren't spending it. Then pays back those borrowings out of tax revenues that come in when the economy gets busy again.
      I believe the first half of Keynes has been tried repeatedly but no politician had the intestinal fortitude to follow through with the second half. Lily livered "conservatives" always demand to give taxes "back" to the wealthy. When they should be simply paying back the money that was borrowed.
      In this "equity" case people would be lending money to the government when they don't want to spend it (like first half of Keynes). And withdrawing the equity, in lieu of paying tax with cash (like second half of Keynes). If enough people would be willing to do it then Keynes might finally get a full cycle of implementation.

    14. Anonymous,

      "I believe the first half of Keynes has been tried repeatedly but no politician had the intestinal fortitude to follow through with the second half. Lily livered conservatives always demand to give taxes back to the wealthy."

      The same can be said of "lily livered" liberals that don't cut spending according to the second half of Keynes.

      When liberals and conservatives can get beyond name calling, they might actually get something worthwhile done.

      "In this equity case people would be lending money to the government when they don't want to spend it (like first half of Keynes)."

      I hesitate to call it lending, though in a general sense it is. The reason I say that is that Congress maintains a debt ceiling and so the first question becomes - would equity sold by the federal government (U. S. Treasury) be treated as part of the debt limit set by Congress?

      My gut reaction is no, it should not be treated as such. The reason is that equity (in this form) sold by the Treasury would be securities that pay returns that are contingent on the level of economic activity (as tax liability falls in a recession, so do the returns on equity). In addition, those returns on equity are not cash expenditures that must be authorized by Congress - there would not be cash redemption.

      For instance, if you have $10,000 of government equity but only $2,000 of tax liability, you would only be able to redeem the $2,000 worth of liability.

      What this really means is that there is no true upper limit to the amount of equity that a government could sell - the amount of outstanding equity would be driven by demand only. Contrast that with government debt where the U. S. could conceivably run into the situation where interest payments on the debt could exceed available tax revenue. Those payments are not indexed in any way to the overall level of economic activity.

      The second question is, would the central bank be permitted to buy equity sold by the U. S. Treasury. Again, my gut reaction is no. Per the Banking Act of 1933 (this created the FOMC), the central bank is only permitted to buy securities where the principle and interest are guaranteed. That would not be the case for these securities.

    15. Anonymous,

      Keynes repeated cycles of borrow (sell bonds) in the bad times and payback the debt in the good times only works (as you say) as long as Keynes Part 1 is followed by Keynes Part 2. That has never happened - instead the U. S. federal debt has grown to almost $20 trillion dollars (About $62,000 for every person in the U. S.).

      Perhaps a different approach is needed?

    16. This comment has been removed by the author.

    17. One other notion to keep in mind:

      There is nothing in the U. S. Constitution that precludes Congress from setting tax rates at a level insufficient to cover expenditures and then refusing to borrow to make up the difference. The Constitution gives the Congress the authority to borrow - it does not force or direct them to borrow. In addition, there is no requirement in the Constitution for members of Congress to have any mathematical ability:

      Question from Reporter: Congressman Joe Smith, you just passed a tax and spending bill that increases the deficit but then voted against a debt ceiling increase to pay for it. Do you have any comments?

      Congressman Joe Smith: The U. S. Constitution permits me and by colleagues to tax (or not tax), spend (or not spend), and borrow (or not borrow). We chose to tax, spend and not borrow.

      Reporter: Follow up. You do realize that the math doesn't work. You will not have all of the money available that you wish to spend?

      Congressman Joe Smith: Under the U. S. Constitution, my requirements for serving do not include being good at math. And really, it is a problem for the Executive Branch of Government now.

    18. Frank,
      Thank you for the affirmation of my comprehension of Keynes.
      Regarding the debt (rather large per person) .... I recall calculating that the 1% of the population with the most income could pay it off in 10 years while still being exceedingly comfy. Perhaps a rather large portion of the debt is owed to them anyway ..... i.e. accumulated inadequate taxation... i.e. just that cumulative lack of Keynes part 2.

    19. Anonymous,

      "Perhaps a rather large portion of the debt is owed BY them anyway ..... i.e. accumulated inadequate taxation..."

      And any conservative would counter that a rather large portion of the debt is owed BY the recipients of government expenditures (military personnel, social security / medicare recipients, etc.). These are the kinds of arguments that grind policy making to a halt.

      "I recall calculating that the 1% of the population with the most income could pay it off in 10 years while still being exceedingly comfy."

      If government sells me equity and then uses the proceeds to pay down debt, does it really matter whether I am in the top 1% or the bottom 10% of the income ladder? This is the craziness of liberal / conservative arguments.

      If you want to reduce the debt, then sell equity. This is not a liberal OR conservative position. It has nothing to do with rich or poor, progressive or regressive, or anything to do with social / economic status.

    20. No, Frank, I did mean "owed to".
      At least some of the government debt must be owed to (i.e. bonds held by) the 1%, surely?
      If anybody is to buy equity from the government it has to be somebody with spare money. I was just pointing out, as a pragmatic observation, that if the most pampered 1% chose to do it, over a period of 10 years, they would feel only slightly less pampered.
      Mind you, if that equity is essentially prepaid taxes, and taxation is not balanced to spending, then it is still just kicking the can down the road. Unless I'm missing something. The equity gets relinquished in lieu of paying tax, right?
      I am not convinced that any of these dichotomies (liberal/conservative, democrat/republican etc.) really exist. It's just people. With attitudes.


    21. Anonymous (E3),

      "No, Frank, I did mean owed to".

      I have never heard that turn of phrase. Bonds can be owned by (held by) someone.

      "At least some of the government debt must be owed to (i.e. bonds held by) the 1%, surely?"

      Yes. And so which would you rather do for the 1% - sell them bonds that offer a riskless rate of return so that they can live high on the hog without lifting a finger or sell them equity so that they must take risk (i.e. do something productive) to reap the rewards?

      "If anybody is to buy equity from the government it has to be somebody with spare money."

      But that doesn't necessarily mean they are wealthy. The propensity to consume though weighted toward the lower side of the income scale is not absolute. There are plenty of poor penny pinchers - my grandmother was one of them. It used to be (my grandparent's generation) that people saw savings as a virtue instead of a vice.

      "Mind you, if that equity is essentially prepaid taxes, and taxation is not balanced to spending, then it is still just kicking the can down the road. Unless I'm missing something. The equity gets relinquished in lieu of paying tax, right?"

      Yes the equity gets relinquished in lieu of paying tax. But you are missing several things.

      1. The road is really, really, really long. If we take away armageddon, foreign invaders, and political upheaval, how long will the U. S. government be able to collect taxes? All securities (bonds and equities) are claims against future income (in this case future taxation) and so what is the value of that future taxation?

      Or more specifically, what is the non-discounted present value of all the taxes the federal government is going to collect? Most economists use a discounting factor equal to the interest rate that the government pays on it's debt when calculating the present value of taxes. But suppose the government sells equity instead of debt - what discount factor should be used (if any)?

      2. The bumps in the road that create problems for debt issuance are recessions. Payments on debt are not indexed for the current economic situation. Equity (in the form of prepaid taxes) is indexed for the current economic situation. As economic growth slows / contracts, so do incomes and tax liability. Meaning that during a recession, some people (both rich and poor) will not be able to cash in some or all their government equity (they won't have enough tax liability) - that is why equity is considered a risk asset.

      Finally, I have never sat down and read Keynes. Does he address equity at all?

    22. Anonymous,

      Let me try to attack the "kicking the can down the road" problem a different way. A government can conceivably sell as much debt as they want with the following conditions:

      1. They must be able to extend the maturity of that debt out to an infinite time horizon. 100 year bonds, 1000 year bonds, 10,000 year bonds, you name it.

      2. The bonds they sell must be of the accrual (not coupon) type. Meaning the bondholder receives his / her interest and principle back when the bond reaches maturity.

      If these two conditions are not met, then there can come a point where the interest due will exceed the available tax revenue. The federal government can suffer a cash flow crisis (expenditures exceed income) but never a solvency crisis (liabilities exceed assets). The federal government's assets consist of all the tax revenue it is ever going to collect out to an infinite time horizon. If the U. S. federal government is dismantled because of foreign invader, armageddon, or political upheaval, then paying back debt is the least of our problems.

      That being said, there is are perfectly good reasons for a government to not sell bonds - they want people to produce and sell goods instead of collecting interest payments. It's all about incentives.

    23. Yes Frank. Sorry about the language confusion. On the screen owned and owed are almost indistinguishable. I borrow $20 from you.... I owe $20 back to you (at least). Only when we get fancy and draw up a contract do you get to own something.
      I have not read Keynes, only explanations thereof. My take is that he was giving a formula for eliminating boom-bust cycles. With the idea that stability is much better for everybody. The notion being that tax rates should remain unchanged while tax revenues go up and down with growth/recession but borrowing/repaying compensates and allows government spending to remain constant. Or even allows increased government spending to fill in the employment gap during recession. And, of course, reduced government spending in the better times in order to pay off the debt and to free resources (e.g. labour) for use by the, growing, private sector. This is entirely opposite to the default notion that government spending should decrease in a recession and tax rates should be reduced in a boom.
      Keynes was at Cambridge, not far from the Engineering building, so my supposition is that ideas about controlling and regulating machinery were able to infuse into his thinking.
      I definitely see the difference between the bond, with annual interest payments, vs equity which may grow annually by the same percentage as the bond interest but the cash benefit is obtained only when a tax assessment is paid by relinquishing that equity (instead of paying cash).
      I very much agree about incentives being the crux of the matter.
      I wonder if availability of the equity/tax mechanism might result in Keynes, both parts, happening simply by people's automatic behaviour?

    24. Sorry, I probably misread "Does he address equity at all?".
      I read rather than .
      I don't know if Keynes theorised about ownership equity.

    25. That didn't work. Many a slip between keyboard and blog.
      I read equity meaning fairness.
      Rather than equity meaning ownership.

    26. Anonymous,

      Thanks for sticking with me so far. With this type of equity there would be a potential rate of return (presumably set by the Treasury / Executive Branch of Government) and a realized rate of return. If I buy $1,000 of equity with a 5% potential rate of return over 5 years (non-compounded) = $1,250. But if I only have $1,100 of tax liability after 5 years my realized rate of return = ($1,100 / $1,000 - 1) / 5 = 2.0%.

      And so your statement:

      "...with annual interest payments, vs equity which may grow annually by the same percentage as the bond interest..."

      This assumes no risk premium, no central bank intervention in the government bond market, and no foreign buyers of government bonds.

      In all likelihood, government equity would offer a potential rate of return greater than what is offered on government bonds because they are riskier, the central bank would not be able to purchase them pushing returns down, and international buyers would have no use for them because international buyers don't pay U. S. taxes.

      Now the fun stuff. Ask any economist - was the deflation of the Great Depression caused by lack of aggregate demand or increased productivity?
      You will get a variety of responses depending on the school of thought (Keynesian, Austrian, Monetarist, Fisherian, Friedmanite, etc.) that the economist adheres to.

      Both increased productivity and falling aggregate demand can cause prices to fall, but the fiscal / monetary response to each cause must be different, otherwise a good situation (increased productivity) can be turned bad or a bad situation made worse.

      Deflation (caused by either lack of demand or increased productivity) creates a problem for private credit because they private credit consists of nominal contracts. Meaning I may owe you 3% nominal on a loan, but because of 5% deflation, my real cost of servicing the debt is 8%.

      That is not a problem for large production companies that have wide access to the equity capital markets - instead of borrowing at an 8% real rate (3% nominal + 5% deflation) they will sell equity shares and offer other perks to make up for the low returns.

      But what about the little guy where the only options are to either run a cash business or borrow from a local bank?

      Government equity can fill a vital role here by lowering the after tax cost of private borrowing. For instance, my mom and pop business borrows $10,000 at 8% real interest (3% nominal + 5% deflation) over one year. My mom and pop business then buys $5,000 of government equity offering a 16% potential rate of return over one year and invests the other $5,000 back in it's business.

      Assuming that 16% rate of return is fully realized (remember we are talking equity returns = no guarantees), at the end of one year my mom and pop business would cash in equity worth $5,000 * 1.16 = $5,800 netting $800 of return. Notice that is exactly the same amount of real interest that my mom and pop business is paying ($10,000 loan x 8.0% Real Interest Rate) = $800.

      My mom and pop business stays in business despite 5% deflation.

      This is that zero bound you may hear bandied about. In the presence of deflation, monetary policy is pretty impotent because the real cost of debt service can rise even when the nominal cost is stable or falling. Fiscal policy can be used to either boost aggregate demand (Keynesian borrow and spend), supply destruction (see paying farmers to burn their crops - yes it did happen), or offset the real cost of debt service (actual supply side economics).

      Supply side economics gets a bad rap because even those that profess to adhere to it (Laffer for instance) don't understand it.

      Supply side economics is NOT about
      1. Tax breaks for the rich
      2. Flat vs. progressive taxes
      3. Marginal tax rates
      4. Maximizing government revenue

      Supply side economics is about using fiscal (specifically tax) policy to offset the real cost of private capital formation - that's it.

    27. And one other thing. Another economic theory you may have heard of is the impossible trinity:

      "The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:"

      1. A fixed foreign exchange rate
      2. Free capital movement (absence of capital controls)
      3. An independent monetary policy

      What should be apparent, is that neither fiscal policy, equity, and productivity are not mentioned. Increased productivity should drive up the exchange rate and / or the interest rate independently of monetary policy.
      If the sale of government equity increases productivity, then it becomes apparent that:

      1. A fixed foreign exchange rate can be maintained by the federal government selling equity
      2. Free capital movement is preserved
      3. Independent monetary policy is preserved

  16. John Cochrane: Reasonably trained economist.

    Great post. It's funny, despite having done and worked on increasingly challenging academic/private sector economic problems, I sometimes slowly forget to think about the fundamental principles of 'who pays the tax', until someone like you reminds me. Maybe it's time I go reread some of the micro principles.

  17. Can you speak to the incentives created by a zero corporate tax rate paired with a substantial individual income tax rate?

    My understanding is that this creates a strong incentive for corporations to shift compensation from salary or equity (which is taxed) to perquisites (which would presumably not be). The argument for zero corporate taxes is straightforward and obvious when there is a clear separation between investments in firm capital and private consumption by the firm's agents. It is less clear how the argument proceeds when those agents can direct the firm towards consumption on their behalf.

    I can't quite find a mental model to put those pieces into place. What are your thoughts?

  18. Corporations never have, do not now, and never will pay a penny in taxes. The only entity that pays taxes is the consumer, you and me. Every type of tax is passed through to the consumer. I have always been amazed how many people do not understand this. Taxes are only paid by the ultimate consumer of the goods and services provided. It is simply a method for Government to hide how much you are in reality paying in taxes. If you do a bit of research, you will find that you pay approximately 45% of your earned income in taxes. If you had taken Second Semester Sophomore High School Bookkeeping you would have learned this.

    1. Could you go a little further?
      There is no real existence to money. Despite the seriousness of bookkeeping.
      What is real is exchanged goods and services.
      The government absorbs goods and services just like everybody else.
      Incomes, expenses, taxes, debits, credits, etc. etc. are all bits of mechanism by which we trust each other, despite the inherent untrustworthiness of many of us, when doing these exchanges.

  19. So, the savings from not paying income taxes will be passed along in correct proportion to those who have actually been paying the taxes in the past, correct?

    And who will pay taxes necessary to make up for the reduction in federal tax receipts?

    And, since US multinational corporations are a direct beneficiary of US military installations, embassies, consulates, and missions all over the world, who should pick up the tab for that?

    1. Doncastro,

      It is liberalism in it's truest form. Only the liberals looking for this free-bee from government wear thousand dollar suits.

    2. Since US multinational corporations declare their net income in some obscure jurisdiction like the Cayman islands they already don't pick up the tab for military, embassies, etc..

    3. Anonymous,

      That is a problem to be addressed on an international basis, and I don't have a good answer for it.

  20. Yes, the corporate tax should be zero. Check it out!

    There's a Better Way, Mister Trump, I: What Is - Arrange to be a "Section 1042 Deferral" C-Corp ESOP.

    There's a Better Way, Mister Trump, II: What Should Be - A Capital Homestead Act

  21. Most economists attribute the recent rise in equities to lower expected tax rates:

    Basically we just had an experiment with "big stock [increases] when [expected] corporate tax rates are [lowered]," which suggests capital is not perfectly elastic.

  22. Unfortunately, the same argument could be made for eliminating the individual income tax and making up the difference with a higher corporate tax. Corporations are an example of government excess. Their principals should, in law, be personally liable and that liability should be unlimited. Corporations should only be chartered for particular purposes, subject to government approval. Further, they should only be chartered for limited periods of time before requiring liquidation. Right now, they are an example of government entitlement run amok.

  23. Sir, a nice post. In India there is one organisation arguing for doing away with all types of tax. THEY PROPOSE BANKING TRANSACTION TAX. Every transaction done through banking will attract a tax of 0.1%. Sir, any thoughts on this?

    1. Speaking for me, not the professor....
      Interesting article about BTT here.....

      I seriously doubt that 0.1% is valid (the article mentions 2%).
      It involves virtual elimination of cash (i.e. coins and notes) transactions by removing anything bigger than about 50 cents from circulation.
      I suppose it would, in effect, be a sales tax. The assumption is that every transaction is reflective of a sale of goods or services.
      The comment is that it (virtual elimination of cash) would be disastrous for India's rural economy. Perhaps BTT would have validity in urban areas where it might be possible to make virtually all transactions electronic. But the latter would equally facilitate a VAT.
      It seems that BTT has no connection to "Robin Hood Tax" i.e. the suggestion for a tiny % tax on all trades of stocks and such.

  24. You mention that workers share 50% of the burden (via Viard). If it's inelastic, shouldn't match labor's share of profits exactly? What causes this discrepancy?

    >"You can see the key assumption I made -- that the rate of return new investors demand does not change..."

    Could you offer some more reasoning, or empirics on this topic? To me, this seems like the key contention. It doesn't seem crazy, but i'm hesitant to accept it at face value.

    Intuitively,if the tax rate did lower the rate of return, what would investors do? It's a national tax, so they cannot go into a different sector. If they want to avoid it, they have to leave the US (which if the overall rate of return is better than alternatives, they wouldn't do.)

    In addition,hasn't the last few years shown that demand on return is elastic? The recession has lowered the rate of return on capital considerably, and "reaching for yield" never quite canceled that out. And don't rates of return vary among industries? It seems unlikely that is solely due to fundamentals like risk. More competitive industries will have lower rates of return, but don't necessarily revert to the mean of all industries.

    Intuitively, it seems like it should be elastic- investors will have some floor that they deem worthwhile, but above that, will attempt to achieve the largest possible return. Only inn nice 101 esque situations should they get exactly their marginal product. In reality, there are going to be rents that provide some leeway to squeeze. Sectors that don't have rents will pass it onto consumers, but the ones that do will give them up in order to compete, until hitting some lower bound.

  25. "If we have no corporate income tax, then people rush to incorporate themselves, pay no taxes on the incomes of their corporations, and only take out dividends as personal income when they need to buy something."

    The above is correct.

    Well, it is fantasy but yes go to consumption taxes, possibly in combo with pollution taxes, fossil fuel taxes, Pigou taxes and import tariffs.

    But you know, those guys down in Barney's Pool Hall control the 26,000-page and indecipherable U.S. tax code, and so changing it is impossible.

    1. Now that power is 3 Rs (executive, senate, house) anything is possible. Even, if they should become rational, single-payer basic healthcare. But they will first have to suppress their impulse to do random nonsense.

  26. I believe that some type of consumption tax for all entities without exclusion is the best tax one could have. There are egalitarian concerns, which may or may not be of interest, but exist whether the egalitarian concerns are valid or not. I wonder if it wouldn’t be practical to have dual tax, a flat tax without deductions that starts at a relatively high level and is fixed by law so the only tax increases possible would be on the consumption side.

  27. Two of my biggest expenses are education and sports for my kids. The idea of a progressive consumption tax kind of makes me chuckle when I think about the massive loopholes that will be created to avoid it. I like the idea of no corporate income tax but replacing it is the much harder part.

  28. How are you defining profits? Revs-expenses( with or w/o depreciation and interest?) How are you treating reinvestment needs; is it a deductible expense? No biz can grow w/o reinvesting in its biz.

  29. The argument is frequently made that the U.S. needs to reduce the corporate tax because our marginal taxes are the highest in the industrial world and the U.S. needs to remain competitive. If all taxes are paid by the consumer or the worker that would mean the corporate tax rate is irrelevant to investment decisions when serving the domestic market?

  30. " Suppose we institute a 35% corporate tax, and suppose corporations as a whole cannot raise prices or lower wages, and they do not shrink in size. Then dividends go down 35%. The stock price goes down 35%. The initial owners of the company lost the entire present value of the corporate tax. But after that, anyone who buys a stock for 35% lower price, getting 35% lower dividends gets exactly the same return going forward. Fast forward 50 years or so, and the current owners are bearing no burden of taxation whatsoever. "

    That analysis of the accounting for a single investor does not apply to the whole of investors taken as a sector.

    The money a available to be paid in dividends after the tax to all investors as a sector is reduced by the tax.

  31. Sure, the corporate tax is paid by the common stock holders, customers and employees. The same is true for every expense of the corporation--whether it is other taxes (Medicare, Social Security, state taxes) or normal operational expenses such as salaries and pensions. So using your logic you could justify eliminating all taxes paid by a corporation. Now if you want to make the case that the corporate tax is a double taxation and the tax on dividends should do the job (full taxation and not the qualified rate) I could buy that. Or you could make the case that most business types don't pay corporate tax (REITs, partnerships, royalty trusts, small businesses) so why should we single out one or two (C&S corps) to pay tax--I could buy that as a reason to eliminate the corporate tax.

    Second point--it would seem to be fairly easy to see who would benefit if the corporate tax was eliminated--just look at a recent C Corporation conversion to REIT status, like Weyerhaeuser. Think it happened in 2010. Corporate tax was eliminated (at least the U.S. portion)--who benefited--did salaries go up--why would they in a competitive world? Did prices of their products go down--why would they in a competitive world. The dividends went up because REIT status forces that to happen.

    1. Bruce7b,

      "Now if you want to make the case that the corporate tax is a double taxation."

      My own inclination is that the corporate tax is not double taxation because a corporation exists as a legal entity distinct from the owners and employees.

      If we should eliminate the corporate tax, should we not also eliminate the standing that a corporation has in a court of law?

      Meaning a corporation that pays no tax should also not be able to sue for non-payment, should not be able to sue for trademark / copyright / or patent infringement, should not be held accountable for debts incurred by the corporation, should not be held culpable for product liability, and the list goes on.

      Mind you, the individual rights of employees and owners to due process under a court of law would still be preserved. And so if you are an owner or an employee working for General Electric in New York and your salary was docked because a supplier in Ohio didn't pay his / her bills on time, you would still seek remedy - just not with a corporate umbrella.

      Does anyone have a clue why corporations (or governments) exist in the first place?

    2. RE: Bruce7bJanuary 29, 2017 at 10:51 AM

      Exactly what the "Section 1042 Deferral" C-Corp ESOP does. And the Capial Homestead Act would allow S-Corps to do.

  32. It is interesting to compare the thrust of this Cochrane piece to Larry Summers' piece (cited above). Summers does a good job, I think, of explicitly placing this debate in its proper societal and moral context. Cochrane, characteristically, does not.

    It is largely for this reason I often feel that Cochrane characteristically argues from an extreme, absolutist position.

    Barry Goldwater famously said, "extremism in the defense of liberty is no vice". How profoundly I disagree with the absolutism of the right-wing mind.

  33. John, Frank Restly

    I apologize if this is a duplication of a point you've both discussed.

    The U.S. (like other developed economies) has systems of laws and institutions that support the various forms of corporate entities, which as Frank says enjoy limited liability protection among other benefits. It is not costless to produce those institutions and in particular, one could imagine both a fixed cost and variable costs based on what sort of activities a corporation is engaged in. So does it make sense to have a corporate tax that is somehow proportional to the usage of those institutions so that there is not a sort of tragedy of the commons effect?

    1. Robert,

      I am open to the argument that corporations pay more / less in taxes that what they receive in benefits. I don't have any numbers that tilt the scales either way, but at least that line of argument (cost / benefit analysis) would be a good place to start a discussion.

  34. Stabbing a zombie in the heart won't kill it. They aren't vampires.

    1. Whoops! Mixed metaphor for sure. Thanks.

    2. Staking a zombie through the heart was Peter Robison's suggestion in Uncommon knowledge interview (at 15:30 here

  35. i'm sorry, why is taxing rates of return a bad idea?

    1. I don't know what "taxing rates of return" means.
      Can you explain it or point to where it was said?

  36. I have one thought, if the rates get too high it would encourage a black market for goods (i.e. Moonshine, Cigarettes, etc.). There is a nice feature to this is it would basically create a hard limit on the ability to collect taxes. I wonder what the maximum rate would be before it would encourage a black market? Enforcement would have to be curtailed to limit the use of force officers can use. Sorry to drag the conversation to the more mundane.

    Great post overall.

  37. This comment has been removed by the author.

  38. So simple this is beautiful, John.
    One easy way to move towards a progressive consumption tax by the way would just be to remove all limits in IRA, 401(k), etc. I think the ideal is a uniform VAT -- with eliminating corporate, income, and estate taxes -- plus on-budget transfers for progressivit

    1. Nancy,

      "One easy way to move towards a progressive consumption tax by the way would just be to remove all limits in IRA, 401(k), etc."

      IRA's, 401(k)'s, etc. are tax deferred - not tax free. And so the contributions are taxed when they are withdrawn.

      Also, a true consumption tax (like a national sales tax) is assessed independently of how it is financed (current income, borrowing, etc.).

      Simply eliminating the limits on IRAs, 401(k)s, etc. would allow tax free savings but would not tax consumption financed by borrowing (car loans for example).

      You can make the argument that the taxation on consumption financed by borrowing will eventually take place as the loan is paid off, but that assumes that it will be paid off and will be paid off from taxable income.

  39. Why is it so difficult to realise the truth in what you say? Here are some of my efforts.

  40. Nice to think that Corporations mean profit-making productive companies producing real stuff. I'm guessing, by number, there are more personal companies, shelf-companies, etc., than "real" productive companies. How to factor in that a significant number of people will keep dividend income inside their own personal company and not pay tax except for the little they withdraw to live on (and thus attracting low-end tax rates)?


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