To Tax Corporate Income or Not to Tax

Jared BernsteinJared Bernstein and Dean Baker are friends and collaborators. But they’ve been having a public debate on the issue of the corporate income tax. Bernstein has argued that we need to keep the corporate income tax because it brings in important revenue revenue, and getting rid of it would be a huge regressive tax cut, because it is mostly the rich who pay it. Baker argues that it is a bad tax that gives corporations huge incentives to avoid it. He even noted in his characteristically amusing way, “The question is, how much will a company pay to avoid paying $100 in income taxes? The answer is up to $99.99.” If you want to read the exchanges, start with Bernstein’s last post, My Last Word on Dean B and Corporate Taxes. You can work backwards from it to his original article in The New York Times, Cutting the Corporate Tax Would Grow Other Problems.

Dean BakerThe discussion is mostly over details and emphases. Not surprisingly, I agree with both of them. They are both brilliant and keen observers of the economy. But it does bring out what I think is a bit of a problem with Baker’s thinking: he doesn’t take into account political realities enough. My favorite example of this is his notion that we don’t need to worry about fewer workers per retiree for the funding of entitlement programs because of increasing productivity. The problem with this thinking is that for the last four decades, productivity has become entirely decoupled from wages. The way that the entitlements are funded, this represents a big problem.

Baker understands this, of course. If you haven’t read it, you should read the book he wrote with Mark Weisbrot, Social Security: The Phony Crisis. That book is 13 years old, yet all of the phony arguments they destroy are still very much still with us. So Baker would counter my argument about productivity with something like, “Of course! My point is that the problem is that productivity is not shared with workers, not that we need a bunch of people working to support retirees.

The maddening thing about this is that he is (as usual) totally right. The problem is that pretty much all economic problems go away if we could just re-couple wages and productivity. I’m concerned that his is often a dangerous way of talking if we aren’t clear about it. And Baker, brilliant guy that he is, often doesn’t hammer home the issue of wages and productivity because it is so obvious to him.

The argument with Jared Bernstein is similar. They don’t really disagree on the matter. Bake is right: the corporate tax doesn’t bring in that much money and it could be replaced with another targeted tax on wealthy people. Bernstein response is basically: yeah, right! This all reminds me of the push by conservatives to lower the corporate tax rate, but keep the amount collected the same by eliminating loopholes. An obvious reaction to this is: if you are bringing in the same amount, why do it? There is an argument to be made that it is fairer. But I think the real reason is that the corporations think they would end up paying less. After all, it is hard to reduce the base tax rate; it is easy to get loopholes put back in.

I think we see the same thing with the idea of eliminating the corporate tax. It is certainly the case that there would be a whole lot more people lobbying on behalf of making the replacement tax less, than there would be on behalf of making it more. So in the end, it would not be offset and so would be a big tax cut for the rich. Just the same, Baker is right that the corporate income tax is a terrible tax. We really ought to replace it. I just don’t see a political climate that would allow that to be done properly for at least a decade—and maybe a lot longer than that.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

2 thoughts on “To Tax Corporate Income or Not to Tax

  1. I don’t quite understand why the corporate income tax is terrible. Because richer companies are avoiding it? Isn’t that a flaw of enforcement? Are we saying that large companies have essentially placed themselves beyond the law at this point? Well, they HAVE, but I’m not sure accepting that as a given is especially useful. Short-term, maybe the more important concern is raising revenue. Long-term, the power of rich interests in general has to be curtailed, and that includes corporations.

    The corporate income tax used to bring in a lot of money. Tons. It doesn’t now because the rate has been slashed, and slashed, and enforcement neutered. Beyond what revenue a corporate income tax raises, it establishes that corporations are subject to democratic oversight, just like everything and everyone else. (Oh, no, democracy can mean government inhibiting “freedom!” Well, yeah, that’s the whole point. You can pass majority rules saying Alice isn’t allowed to dump her sewage in Ann’s backyard. If most citizens approve of this, it’s a good thing. Right now our laws aren’t determined by majority rule but by sheer financial power, and that’s a bad thing.)

    There are a zillion ways you could structure the corporate income tax to encourage useful corporate behavior and discourage harmful behavior. You could tie the tax rate to salaries, penalizing low-wage companies. You could tax corporations that routinely violate regulations. (Currently companies will back, for example, punitive fees for environmental violations, knowing that they can afford to pay thousands of those fees annually and small businesses cannot, so the fees help destroy competition. Often corporations lobby for these fees for exactly that reason.) You could penalize companies for raising money in harmful ways (junk bonds.) A lot of other penalties I’m sure Nader and many clever others have imagined.

    Why throw out one of our better means of curtailing corporate crime? (It’s sometimes easier to go after a tax dodger than a violator of civil law, as we may remember from Al Capone.) Because we’ve neglected it for so long it’s become ineffective? Might as well say that because the Attorney General’s office in Some State used to go after crooked businesses, but under a Republican government doesn’t do that anymore, then we should get rid of that Attorney General’s office. No; not correct. We need to elect people who use that office the way it’s supposed to be used.

    Short-term, Baker is probably right; we can enforce taxes on CEOs easier than corporations. Long-term, if these companies want to do business in this country, then they need to be brought to heel. If we just give up on every means of democratically overseeing their behavior which they currently elude, eventually we’ll give up the idea of overseeing their behavior at all. Companies can be much faster than democracy at adjusting to circumstances and snaking their way through the law. It helps to have a lot of different laws you can throw at them. As, again, Capone discovered.

    • It does seem to me that a better way to tax corporations is just to tax dividends. So the argument against corporate taxes is a practical one: corporations will always find ways around taxes. But a simple solution would be international agreements to stop different countries from becoming tax havens. It is interesting that we’ve had no problem getting international support for free trade that has destroyed worker power. But doing the same to put the smallest limits on corporate power is out of the question. It’s very sad.

      You are right that there are scores of things we could do right here at home. The problem, like so much else in our political system, is income inequality married with basically no campaign finance restrictions.

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