Arnold Kling  

Sense and Nonsense on Tax Reform

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Jason Furman, Larry Summers, and Jason Bordoff write

We believe these principles should command wide assent as policymakers consider tax reforms, whether incremental or far-reaching:

1. Fiscal responsibility requires addressing both taxes and spending.
2. Rising inequality strengthens the case for progressivity.
3. The tax system should collect the taxes that are owed.
4. Tax reform should strengthen taxation at the business level.
5. Taxes for individuals should be simplified.
6. Social policy can and should often be advanced through the tax codeā€”and it must be well designed.

Some of what they have to say makes sense. For example, they point out that income distribution policy is better handled with taxes and transfers that are based on income, rather than indirectly (through farm subsidies, for example).

Which is why point (4), "strengthening" business taxes, is nonsense. The corporate income tax is merely an indirect, ineffective tool for redistribution. If enough people understood economics, you would not have a corporate income tax. This tax stands as a monument to ignorance of basic economic concepts, particularly tax incidence analysis.

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COMMENTS (8 to date)
ed writes:

I haven't read the paper, but the list doesn't say "taxes on business income," it says "taxes collected at the business level." So I think that would include the payroll tax, or a hypothetical VAT, and is consistent with various consumption tax proposals.

ryan writes:

I wonder if the corporate income tax is an easy way to avoid a tax dodge -- if you just pay everyone in stock, would the income tax catch that? I suppose I'm not asking a public finance question as a tax law one.

Mike writes:

Then this is a doozy of a plan by NYS.

It is totally comical. No mention of spending as a problem; increase taxes on business; and hoping that Santa Claus will deliver the money when it is needed.

There's a reason I left NY. It's too bad, I find it otherwise to be the greatest state in the land.

Wild Pegasus writes:

I agree with #1 and #5. The rest are either immoral, incoherent, or poor policy.

#2 is wrong. Rising inequality strengthens the case to search what's rising and if it's being subsidized. In our current system, the rich get to off-load a lot of their costs onto the state, while retaining the profit. And the depth of regulation and complexity of taxation is an indirect subsidy to compliance officers and away from productive members of businesses. Cherche le subsidy.

#3 is wrong. Taxation is theft. No one should be punished for refusal or resistance.

#4 is incoherent. Generally, it is a bad idea, though. Taxation should be directed to the taxpayer clearly and transparently, and the taxpayers should always know how much they're actually paying. Hence, taxes should be shifted to the individual and away from shadow taxes, and withholding should be replaced with cutting the state a monthly check. That's good policy for keeping fiscal responsibility on the public's mind, principle #1.

#6 is immoral. The state has no business having a "social policy". Nor is it good policy - a tax code malleable by social policy is open to all sorts of lobbying, pandering, and corruption. It pours more sewage into an already dying lake. It also violates principle #5, that taxes should be simple.

- Josh

Lord writes:

Taxation is a shell game; anything untaxed becomes a diversion for other income. That is why business taxes are an essential component of any tax system. If enough economists understood taxes maybe they would exhibit a little less ignorance of their own.

Matt writes:

I understand incentives, but when our total tax bite is approaching 40% of GDP, anything short of eliminating entire taxes and slashing spending programs like Medicare isn't going to do much of anything.

The EU has lower corporate and capital gains taxes and competitive financial centers like Hong Kong don't even have a capital gains tax. I'm just waiting for the day when a company like Coca-Cola or Boeing relocates to Hong Kong and moves trading of their shares from the NYSE to the Hang Seng. Let the peasants calculate their tax.

Thomas Boyle writes:

Rising inequality is partly caused by tax progressivity. People forget that government, too, responds to incentives. Whenever a government policy (more likely the low-level, detail policies rather than grand, platform-level policies) shifts gross income from low-rate taxpayers to high-rate taxpayers, tax revenues go up. Simply, policies that increase income inequality will increase tax revenues. Since policies are reviewed for revenue impact, policies that increase income inequality will, over long periods of time, have an advantage that causes them to accumulate faster and last longer. Thus, over long periods, progressive taxes should create a bias in regulatory actions (you may refer to it as the Boyle Effect), make the government ever-more sensitive to the welfare of the few who pay all the taxes, and indirectly drive up the incomes of high-rate taxpayers. It amazes me that no-one realizes this.

Floccina writes:

The corporate tax favors partnerships and sole proprietors over corporations because partnerships and sole proprietors are not double taxed corporations are but the corporate person provides protection against liability so why should the corporate person not be taxed?

Why do so few companies stay partnerships and sole proprietorships when they get large and I have never heard of corporation turning into a partnership to avoid the double taxation but they could.

An example of a reason to support taxes of corporations: In the tobacco law suite, since all the tobacco companies where made to pay, the victims (I assume hear that there wear victims at all) of the tobacco companies ended up paying the damages rather than the management and investors who made money from the damaging actions. If the tobacco companies were partnerships without protection of the corporate person the partner who gained may have been made to pay.

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