Jared 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.
The 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.