Sunday, June 1, 2008

The Problem with "The Problem With the Corporate Tax"

Not to overly rely on the Sunday NY Times for material, but I couldn't help remarking on "The Problem With the Corporate Tax," by N. Gregory Mankiw (Harvard econ prof., Bush and Romney adviser).

The gist of the article:

"In fact, a corporate rate cut would help a lot of voters, though they might not know it."

While recognizing that the proposed McCain reduction of the rate from 35 to 25 percent would cost the federal budget $100 billion a year, and derisively acknowledging that "Populist critics deride this train of logic as "trickle-down economics," he nonetheless argues that lower corporate taxes would be better for everyone.  


Well, the main argument is a variation of trickle-down--he frames corporations not as tax-payers, but as tax-collectors, essentially collecting taxes on the persons who hold equity in the corporations.  Now, one could argue that this is in fact fair because presumably everyone who purchased those shares (or otherwise gained equity) knew what the tax rate was when they did so.  Specifically, they could have taken equity in a non-corporate business, e.g. formed a partnership, but of course people who work in finance or who don't work (live off investments) couldn't always put money in a non-corporate entity--oh well...

Second, it turns out that a corporate tax is actually a tax on labor.  Mankiw points to a study by William C. Randolph of the CBO that 70 percent of the corporate tax burden is borne by labor, and an Oxford study that each $1 increase in a company's tax bill reduces real wages by 92 cents.  Of course, no one is stating that if corporate taxes were decreased, these companies would suddenly raise wages--no, the increase in profitability would instead go to those same equity holders in the corporation.

He also points to suggestions in the Randolph study that "the domestic owners of capital can escape most of the corporate income tax burden when capital is reallocated abroad in response to a the tax."  This, of course, says nothing about what happens if we fail to decrease the tax rather than merely leave it at the current rate.  Additionally, it fails to recognize that the U.S. is projected to continue to be the largest recipient of foreign direct investment by far for years to come, and that up until the very recent past, there has been such a surplus of capital that it has had to move to an entirely synthetic economy, i.e. derivatives, in order to find sources to suck it up.

So, if you are a pessimist and think the U.S. economy is on an irreversible descent, and will no longer be a source for foreign investment, and our only hope is to make it cheaper for corporations, as opposed to other business entities, to conduct business, then you might agree with Mankiw.  If not, should the U.S. reduce its income by $100 billion a year when it has large outstanding debts?

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