Editore"s Note
Tilting at Windmills

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January 23, 2007
By: Kevin Drum

TAX WONKERY SPECIAL EDITION....Mark Schmitt has a very nice, readable article in the current issue of the Monthly about the current state of play on taxes. He believes that just as Proposition 13 and Ronald Reagan ushered in the era of the tax revolt 30 years ago, there's evidence that the aging of America combined with the fiscal recklessness of George Bush is bringing it to a close:

The truth is that we are heading down a path toward fiscal crisis that will inevitably require a major increase in revenues. In case that sounds like a euphemism, I'll say it plainly: Taxes must go up.

....If the tax reformers of the future are to make good on the promise of lower rates, as well as surrendering the revenues from the AMT, as well as paying for an aging population, they will have to go well beyond the boundaries of the income tax. And here is where the greatest opportunities for an entirely new political configuration may be found. Conservatives have always been interested in taxing consumption as a way of encouraging savings and investment, and liberals in need of revenue will have no alternative but to reconsider their historical aversion to consumption taxes as regressive.

....While consumption taxes are inherently less fair than a progressive tax on income, there are ways to moderate its unfairness, and if a consumption tax were directly linked to a positive social good -- such as a VAT that pays for universal health care -- the entire package, taken together, would be enormously progressive.

Sounds good. And as long as we're thinking big, I'll toss out one of my favorite outlandish suggestions: why not abolish the corporate income tax as part of this grand bargain? After all, it doesn't raise all that much money any more (less than 2% of GDP); it's by far the biggest source of tax complexity we have; it mostly gets passed on to consumers anyway; and it's the foundation of all corporate welfare. Take away the corporate income tax, and presto! No more tax breaks for special interests. K Street would be decimated.

Consider this deal: The corporate income tax goes away. It's replaced by a VAT plus an increase in capital gains and dividend taxes to the same level as the tax on income. (Added bonus: the whole "double taxation" argument goes away since corporate profits aren't taxed in the first place.) And the whole thing is used to fund national healthcare (along with the payroll taxes and general fund revenues that are already dedicated to healthcare). States could be encouraged to follow suit by agreeing to pick up the Medicaid costs of any state that kills its own corporate income tax.

Big business ought to love it. Their income taxes go away, and with it whole platoons of their accounting departments. No more relocating corporate headquarters to Aruba! Healthcare also goes away, which promises to save them both money and hassle. The replacement tax, a VAT, is easy to administer and is directly passed on to customers, much like a sales tax. Every business would be on a level playing field, regardless of size or industry.

Of course, corporate executives wouldn't much like the idea of higher taxes on investment income. But they'd go along because they make lobbying decisions based on what's good for the corporation, not what's good for their own bank accounts, right?

Right?

POSTSCRIPT: Since no one else that I know of has ever proposed a deal like this, I assume it's a dumb idea. But I'd be curious to learn why it's a dumb idea. If the corporate income tax were responsible for a significant part of the federal budget, I could see why we'd need to keep it. But in fact it's responsible for no more than a tenth of all federal receipts. So why not kill it and replace it with something better?

Kevin Drum 1:32 AM Permalink | Trackbacks | Comments (114)

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Pelosi!!

Posted by: Ghost of Tom Joad on January 23, 2007 at 2:19 AM | PERMALINK

K-Drum,
It's not a dumb idea. I am not an economist, so I don't know whether it is a good idea or not, but it should be on the table as discussed, especially with all the corporate welfare there is these days. Hell, it maybe even be revolutionary. It would leave the wing-nuts speechless.

Posted by: Ghost of Tom Joad on January 23, 2007 at 2:21 AM | PERMALINK

But if the corporate tax is 0%, what would stop me from setting up a fake corporation that earns my job income, and doles it out to me, or spends it on work nescesities like new computers & such. Won't that just create another tax dodge?

Posted by: MobiusKlein on January 23, 2007 at 2:28 AM | PERMALINK

Let me counter offer-
We eliminate corporate taxation as you suggest,
instead we tax all income including capital gains at the same rate as regular income.
we keep deductions like the one time cash out at retirement for your primary residence, and the ability to shift investment income back two years to offset earlier losses..

Health insurance has nothing to do with this.

perhaps we should also tax corporations on retained profit- profits kept by the company rather then paid out for expenses salaries and dividends. We could then tax this on a simplified basis.

Posted by: Aaron on January 23, 2007 at 2:32 AM | PERMALINK

And just like Iraqis, Corporations will throw flowers at our feet for doing this? Too funny. Hey, Bush wants to reform Social Security, not end it. Wishful thinking.

Posted by: mario on January 23, 2007 at 2:41 AM | PERMALINK

Original, provacative posts like these demonstrate why Washington Monthly stands head and shoulders above all other liberal blogs.

Posted by: Old Hat on January 23, 2007 at 2:56 AM | PERMALINK

I'm not uptodate on all this, but, no, there's nothing crazy about the idea. And Lithuania have a flat incoe tax and seem happy with it.

Of course, VAT produces its own battalions of accountants and it is, of its own, regressive, but it is the whole picture that counts.

However, taxation is and should be fungible so tieing VAT to universal healthcare is dissembling.

Which leads me to Schmitt's shouting "crisis". I'm not sure how true that is. I know I've read that the social security "crisis" is based on a very low productivity assumption so that, at the moment, quite minor changes in assumptions pushes the "crisis" further and further out. Equally, the budget "crisis", as Schmitt suggests, can be brought back in line.

The trade balance "crisis" is based on the fact that the US lives on ever-increasing debt, public and private. What do you expect? So, again, quite mild changes in economic culture would lead to a significant decrease. In line with that, taxing retained earnings would be a no-no as this is future investment (savings) or dividends which will be taxed.

I could dribble on. My main concerns would be to make sure that, overall, taxes are progressive and that, culturally, we start to narrow the earnings disparity. That is reduce the over-reward of people feeding from the trough which is cleaving US society slowly but surely day by day.

Posted by: notthere on January 23, 2007 at 3:02 AM | PERMALINK

VAT

Every political party that has introduced a VAT in modern times has been politically extincted.

In Japan, it cost the Liberal Democratic Party their 50 year continuous rule.

In Australia, it sank the Labour Party, I believe.

In Canada, the Progressive Conservative Party self-destructed, the Party dropped to 2 seats in the next election (from over 140). The Party was then shut out of power for 12 years, and eventually had to merge with a (further right wing) Reform party to regain power.

That's all you need to know.

Introduce a VAT, you are destroyed for a political generation.

Posted by: Valuethinker on January 23, 2007 at 3:05 AM | PERMALINK

I forgot.

Morgage interest relief. That goes to my last point about income disparity also. I think this one is untouchable but look at the change in house prices in real terms over the last 20 years, particularly in the major conurbations. Talk about cleaving society!

Posted by: notthere on January 23, 2007 at 3:08 AM | PERMALINK

Getting rid of corporate taxes would not get rid of K Street. Not even close. There are still myriad ways government affects industry. There's the personal income tax (and legions of lobbyists from home builders, mortgage bankers, etc.), there are all the rules and regulations (the credit card industry got bankruptcy "reform"), outright subsidies and bailouts (agribusiness, automobile makers, airlines), procurement (e.g. defense contractors), etc. K Street lobbyists would just shift their attentions elsewhere in order to seek comparative advantage for their clients. And you're forgetting that plenty of K Street lobbyists would fight getting rid of the corporate tax completely since a lot of them receive comparative preferential treatment. I think that's naive in the extreme.

And unfortunately the VAT is regressive (and its closely related cousin the sales tax). So are Social Security payroll taxes. Most people think regressive taxes are bad. In theory it is possible to ameliorate the regressive nature of these taxes, but did I mention K Street? Politically it's quite easy to chip away at these patches, usually by making sure they go to people who shouldn't get them. (Think farm subsidies as merely one example.) At which point you might as well just choose a progressive tax schedule in the first place.

And I don't think you even have the correct percentage for corporate income taxes because I think you're confusing percentage of GDP with percentage of federal tax receipts. The corporate income tax brings in roughly 8% of federal income -- still quite substantial, actually. But what's more interesting is that, in the 1950s, the corporate income tax represented about one third of federal revenue. How about increasing corporate taxes back somewhere near the 1950s level?

Do corporations pass on income taxes to consumers? Certainly not fully, and probably not regressively. Ideally the taxes are levied on genuine corporate profits, so (again, in theory) they shouldn't affect corporate decisions about resource allocations. Economists generally like reasonable taxes on profits because they distort incentives the least. A VAT, in contrast, would be quite recessionary and be a big job killer. Consumers would cut back dramatically on everyday goods and services, especially "discretionary" spending, many of which (e.g. restaurants) are produced locally rather than imported. Not good. And here come the K Street lobbyists for the restaurant industry. :-)

Supremely bad idea, actually.

Posted by: A Pilot on January 23, 2007 at 3:17 AM | PERMALINK

I can't even remember whether it was the Labour or Conservative party that introduced it in the UK. Of course, every EU member nation has VAT, too. I can't remember the political landscape changing that much where any parties were extinguished.

My memory isn't what it was though.

Posted by: notthere on January 23, 2007 at 3:19 AM | PERMALINK

A prime tenet of liberalism is a concern for others, and in that spirit, I offer a favorite conservative subject revised liberal style -- the flat tax.

First, revise the most punitive and unfair tax, Social Security. Exempt the first $10,000, then, flat-tax all income. Apply a generous means test for benefits eligibility, assets of $15M, or income of $200K would disqualify yearly. It's supposed to be a social safety net insurance -- run it that way.

Now, the income tax. There are few deductions: The first $15,000 income, additional $10,000 per dependent, other taxes paid, charity and social beneficiaries, maybe medical expenses, maybe mortgage interest up to a million bucks.

Retain a high threshold inheritance tax: $5 million each recipient?

Corporate and business taxes are similar, few deductions beyond R/D and charity/social work.

Each Congress sets a two-year tax rate. They live under the previous Congress’s decision, then set their two year projection. One year to blame on others, one of their own. Every Congress.

Bush's current policies simply don't respect salary or wages -- this will equate all income. Deficits or surpluses will be planned. State income taxes address the infrastructure. The true costs of our health care aren't yet decently allocated. The costs of defense, social programs, health care and infrastructure will be more open.

Posted by: Richard W. Crews on January 23, 2007 at 3:34 AM | PERMALINK

A Pilot --

I don't see where any of the anti-points you made don't at least equally apply to or are exceeded in the present system. Look what's been happening to property taxes; that's regressive.

The way we are going at the moment, the merry-go-round has to either slow down a bit now or it will come to a shuddering halt further in time.

A complete overhaul of the tax system is certainly a good starting point. Remember when Reagan said he was going to simplify it and when the whole process wa over we had n-thousand more pages of tax code.

In reality, it probably won't happen but debate on the idea is so horribly narrow: Flat income tax -- yech!; VAT/Sales tax only -- phwt!; or put your head in the sand and pass more tax reductions. Time to look at the whole.

Oh yeah, and another I forgot above:

CARBON TAX. That's the biggest part of the problem; that's what needs to be taxed -- progressively higher over time. Rising real prices will provide both the dissincentive to produce/use and the economic incentive for alternatives.

Mercury tax? Methane tax?

Posted by: notthere on January 23, 2007 at 3:38 AM | PERMALINK

It's a good idea. I've been writing this idea up in essays going back 20 years. The corporate income tax is a bad tax. It's hard to figure the incidence, because the incidence depends on elasticities in the product, labor and capital markets. In some cases, like tobacco, consumers pay the tax. In others, like auto manufacturing, the workers pay the tax. In still others, like computer manufacturing, stockholders pay the tax.

The reason it's hard to enact is two-fold. First, Democrats demagogue taxing corporations. They want to tax evil Exxon. Second, corp taxation give them goodies to give away. The very tax breaks Kevin rightly complains about are the bread and butter of an entire DC industry.

Abolishing the corporate income tax and making up the revenue by removing loopholes from the personal income tax would go a long way to simplifying the tax code, and would make a significant dent in the ability of Congress to behave corruptly. Or making it up with a BTU or consumption tax. All good.

So it won't happen. Institutional pressures will keep the Christmas tree tax manipulation in place.

Posted by: jayackroyd on January 23, 2007 at 4:03 AM | PERMALINK

Tonight on CSPAN I saw a presentation by Ted Halstead, editor of The Real State of the Union: From the Best Minds in America, Bold Solutions to the Problems Politicians Dare Not Address. I'm not an economist either, but his ideas sounded very compelling and his tax proposal was changing from an income tax to a "progressive consumption tax".

I wish I had listened closer now to the particulars on how it could be implemented. I believe consumption was determined as a function of both income and purchasing. At the time, it sounded very logical. I hope both Halstead's and Kevin's ideas get further discussion.

Posted by: DevilDog on January 23, 2007 at 4:33 AM | PERMALINK

What A Pilot said, above.

Posted by: SJ on January 23, 2007 at 4:39 AM | PERMALINK

I'm about the furthest thing from an economist, so if someone in comments (or elsewhere) tells you why it's a bad idea, be sure to summarize for the rest of us in a follow-up post. Thanks!

Posted by: Mike D on January 23, 2007 at 4:40 AM | PERMALINK

"In Australia, it sank the Labour Party, I believe."

Incorrect. It was introduced by John Howard early on in his administration and he has gone on to become Australia's longest serving prime minister. It only takes a second to google before you post.

Australia's experience with VAT (here we call it the Goods and Services Tax or GST) is that it initially produces alot of whinging, perhaps enough to sink a government. Within about 3 years people have forgotten about it. Within 7 years alot of people are very happy with the extra revenue, especially if the deal to introduce a VAT directs the revenue to an area of government that everyone wants to see get money.

Here the deal was that the federal government would introduce a 10% VAT and collect it too, then give all the revenue directly to the state governments without conditions. This was great because the state governments are responsible for alot of infrastructure and public services but don't have much power to collect revenue. So they always had to depend on the federal government for money which they would only give out with lots of strings attached.

The upshot is, exempt food and set the rate low enough and the regressive side is not too bad in practice, although Australia does not have the extremes of poverty that the US does because our welfare system is a lot better so take that with a grain of salt. After a couple of years no-one cares anymore anyway.

Introduce a VAT and direct the revenue to universal health care and you probably have a winner.

Posted by: still working it out on January 23, 2007 at 5:01 AM | PERMALINK

I have two questions about eliminating corporate income taxes that perhaps someone can help me with:

1. Would eliminating the need for income tax accounting make it harder in any way for shareholders or the government or outside observers to spot bribery, fraud, embezzlement, waste, incompetence, etc.?

2. What would be the net foreseeable effects on donations to charities and would big charities be inclined to oppose the change?

Posted by: Ross Best on January 23, 2007 at 5:36 AM | PERMALINK

Great idea, Kevin; but there are a few problems. Funding health care from a dedicated revenue stream is a bad idea because third-party payment for health care is inherently inflationary and the cost will quickly outrun the revenue source. Did you know that Medicare was originally supposed to be funded from payroll taxes and Part B premiums? Now it is funded about one third from general revenues and borrowing. The other thing is that liberals will not go for a GST (what VAT is called in Canada) because they think it is regressive. It is infuriating that these same liberals will fight so hard to defend and even increase payroll taxes so that Jack Welch and Warren Buffet will continue to receive Medicare and Social Security benefits. If revenue from a consumption tax should be dedicated to anything, it should be dedicated to ending payroll taxes. A tax on payrolls is a tax on jobs. If any politician wants to do something about pollution or global warming or our involvement in the Middle East they should be for a tax on the consumption of carbon in all its forms, plus a tarrif on oil imported from OPEC. Finally, the power of K St. is related to the power of government. Lobbyists are looking for subsidies or for relief from regulations or taxes or for taxation and regulation of their competitors. If government got its hands out of the economy lobbyists would have nothing to do.

Posted by: jimbo on January 23, 2007 at 5:37 AM | PERMALINK

This is the reformed Swedish variant. They don't
have zero corporate tax rates but now have lowest
in western world, and a VAT that taxes consumption.
Further indication that the reformed Scandanavian
welfare states have lessons to teach.

Posted by: TM on January 23, 2007 at 6:35 AM | PERMALINK

I've never understood the "double taxation" argument. Corporations are separate legal entities; they are not their owners. That's the whole point of organizing as a corporation. Therefore, it's not "double taxation" to tax corporations; it's simply recognizing their status as separate entites.

Some people want to eat their cake and have it too . . .

Posted by: rea on January 23, 2007 at 6:43 AM | PERMALINK

It's a good question, but doesn't the answer to this question depend on ones model?

That is, are corporations "bodies" that benefit from the public sector--roads & bridges, internet, an educated workforce, blah, blah? This is the traditional view and in this view, it seems fair for corporations to pay something for these benefits. I notice that corporate tax revenues were highest in the 1950s when regulation was also the highest, I believe. So one infers that government was exerting some control--through taxation & regulation--on corporations to ensure that American citizens were not taken advantage of.

Or is the corporation simply a mechanism through which the general welfare is promoted--they provide a means of income,opportunties to generate wealth, goods and services for citizens. If this is the model, then what you propose makes sense--individual citizens pay taxes to obtain government services, and corporations are enabled by these services to provide employment, and goods and services.

If corporations are a mechanism, then it seems logical that government is responsible for those things which affects all citizens (including services & planning of the future) and corporations provide goods & services to those who choose to purchase them. In this model, then it would make sense that basic health care is provided by the government (as a service to citizens). People who want additional health care can purchase supplemental care in the free market.

As one pursues this different model, one also wonders how the concept of privatization is affected? How is regulation involved? As we have seen, over and over, the government (and citizens) lose control of quality and costs when we privatize or deregulate. We know that the free market is not a good model for certain services and social goods--health care, education, conservation By eliminating the corporate tax, the government would lose one way to influence corporate behavior. So should we plan to have greater regulation (or supervision if we privatize), to ensure they are indeed keeping up their part of the bargain to deliver employment at a fair wage, quality goods and services?

I don't know...let's see what the lawyers and economists have to say.

Posted by: PTate in FR on January 23, 2007 at 6:44 AM | PERMALINK

I think dropping the corporate income tax and increasing personal taxes is a good idea. Other than 'conservatives want to tax consumption', why make this complicated? One set of progressive tax rates on investment and income. Period.

I think the idea of encouraging investment by lower capital gains rates or discouraging consumption with a VAT is kind of silly. I think there's even research that bears that out.

Posted by: jhe on January 23, 2007 at 7:05 AM | PERMALINK

BTW. I think that a large chunk of corporate assets (it used to be most) are owned by pension funds -- so it is not necessarily a good proxy for a higher top marginal rate.

Posted by: jhe on January 23, 2007 at 7:07 AM | PERMALINK

But if the corporate tax is 0%, what would stop me from setting up a fake corporation that earns my job income, and doles it out to me, or spends it on work nescesities like new computers & such. Won't that just create another tax dodge?

That's why a consumption tax makes more sense than an income tax. It's really hard to define income completely consistently.

Posted by: jayackroyd on January 23, 2007 at 7:13 AM | PERMALINK

Let me counter offer-
We eliminate corporate taxation as you suggest,
instead we tax all income including capital gains at the same rate as regular income.
we keep deductions like the one time cash out at retirement for your primary residence, and the ability to shift investment income back two years to offset earlier losses..

Taxing capital gains and dividends as normal income, or even at a higher rate, would serve the purpose the corp tax is supposed to serve, taxing shareholders.

Posted by: jayackroyd on January 23, 2007 at 7:15 AM | PERMALINK

1. Would eliminating the need for income tax accounting make it harder in any way for shareholders or the government or outside observers to spot bribery, fraud, embezzlement, waste, incompetence, etc.?

No. Corporations already keep two sets of books, one for tax purposes and one for reporting earnings to shareholders.

Cost of compliance is quite high, actually. And the government has to spend quite a bit of effort defining depreciation schedules. This is another way of shoveling stealth subsidies to corporations. You may recall that Eastern Airlines lost money for a decade, but stayed in business for that same decade. That's because the depreciation schedules for airplanes was set so favorably for the airlines. Planes were still usable after their official economic life had ended.

Posted by: jayackroyd on January 23, 2007 at 7:26 AM | PERMALINK

I hope the economists will also weigh in on "why the VAT?" is such a good idea. Every time I read about the economy I read things such as this example I just grabbed off google: "While the U.S. economy is rolling through a soft patch — mainly because of a market correction in housing, weaker than expected consumer spending, and a long-overdue slowdown in manufacturing activity — stronger growth is ahead in 2007"

In other words, the US economy is directly affected by consumer spending. When consumer spending is high, the economy is strong. When consumer spending is weak, the economy softens.

Yet, the idea behind the VAT, a consumption tax, is that consumers spend too much and borrow too much and don't save enough. The theory is that we need to spend less, borrow less, and save more in order to have more money available for capital formation & growth.

But while I think reducing indebtedness is an excellent idea, won't the consequence of spending less and saving more be a softening of the economy? Meanwhile, I keep hearing about slow economic growth in Europe, which has the VAT...so claims that the VAT will stimulate growth make me wonder.

The bottom line for me is that conservatives think the VAT is sweet. Given the last six years, can we really trust any conservative economic proposal, especially where taxes are concerned??? I think we can be 100% confident that the outcome will be the opposite of what they claim and will increase inequality at the same time.

Posted by: PTate in FR on January 23, 2007 at 7:30 AM | PERMALINK

I've never understood the "double taxation" argument. Corporations are separate legal entities; they are not their owners. That's the whole point of organizing as a corporation. Therefore, it's not "double taxation" to tax corporations; it's simply recognizing their status as separate entites.

Businesses don't pay taxes. People pay taxes. The corporate income tax is intended to tax shareholders. It's intended to capture tax revenue from retained earnings. In the process, it does tax dividends twice, once as earnings and again as dividends.

As I mentioned above, though, the incidence of the tax depends on what the corporation does. If it can pass it on to workers or consumers, than the shareholders aren't paying the tax.

The simplest thing to do if you want to tax shareholders is to do it more directly. Tax capital gains as normal income. Tax dividends as normal income.

If it were up to me, I'd increase the progressivity of the personal income taxes as well, by capping the home mortgage deduction and dropping the payroll tax cap.

Posted by: jayackroyd on January 23, 2007 at 7:36 AM | PERMALINK

VAT is generally too regressive.

Keep in mind what the fiscal outlook was in 2000.

Posted by: Gore/Edwards 08 on January 23, 2007 at 7:39 AM | PERMALINK

Why not restore the steeply progressive income tax and eliminate all loopholes...then finance health care and education for all from that?

Beltway guys seem to have become jaded (like Hillary) and limit their vision to what K street says is plausible

Everybody seems to have given up on the 16th Amendment. Reducing corporate and private wealth power by steep progressive taxation, is the only way we wll ever get meaningful voting power for each voter.

Posted by: Doug Page on January 23, 2007 at 7:54 AM | PERMALINK

I thought the same thing as we were having the debate on eliminating the taxation of dividends. It makes much more sense to tax dividends and eliminate the corporate income tax. I wonder, however, if there must also be a concomitant change in corporate accounting such that it wouldn't be allowed to simply stockpile cash (or suck up all its own shares)? I believe it was an interview with the author of the book "Perfectly Legal" where I first heard of how CEOs bilk the taxpayers by defering their pay, thus making the corporation pay taxes on it, and somehow this was lessening their own tax liability. I really should read that book.

Posted by: jhm on January 23, 2007 at 7:55 AM | PERMALINK

jhm--

Eventually shareholders get the money in one form or another. The share value will reflect retained earnings. Taxing income at the corporate level is intended to make the revenues less "lumpy." Warren Buffet's unwillingness to cash out has the effect of delaying the taxation of retained Berkshire Hathaway earnings.

Posted by: jayackroyd on January 23, 2007 at 8:00 AM | PERMALINK

A lot of wonkery here.

I'll agree with a lot of Kevin's post. Certainly dividend and capital gain taxes should be at least as high as taxes on coal miners and and trash collectors. Recipients probably should contribute to SS and medicare also.

But if we really want to capture the public's imagination we need to have a series of competing "tax the asshole" bills thrown out there.

Republicans can suggest taxing at a higher rate: non-citizens, felons, pornographers, planned parenthood employees, violent videogame programers, hollywood studios, and hip-hop artists, people who don't eat pork, etc.

Democrats can suggest taxing the plutocracy in various ways. Sweet 16 parties trigger a special 500% sales tax. Imported marble is taxed at 100 dollars/pound. Yacht licenses will cost a million dollars per each meter over 30. And so on.

Posted by: B on January 23, 2007 at 8:01 AM | PERMALINK

Valuethinker,

"Every political party that has introduced a VAT in modern times has been politically extincted.
In Japan, it cost the Liberal Democratic Party their 50 year continuous rule."


Last I looked (this evening) the LDP still has a stranglehold on Japanese politics with no serious threat to its majority in sight. The nearest competetor DJP also supports the consumption tax and has supported the several raises in the tax rate that have happened since the party's creation a few years back. On the other hand both the Socialists and the Communists who were and are the strongest opponents of the tax have LOST support since the tax was introduced.

Posted by: joe on January 23, 2007 at 8:07 AM | PERMALINK

> It's replaced by a VAT

I am personally in favor of raising taxes somewhat (which would hit my tax bracket quite hard ;-( ), but VAT is an absolute disaster. Talk about a non-transparent, lawyer-controlled, non-democratic institution: VAT is all that and worse. Uber-insider-politicians love it, which should be reason enough to just say no to VAT.

Cranky

Posted by: Cranky Observer on January 23, 2007 at 8:10 AM | PERMALINK

A Pilot,
"A VAT, in contrast, would be quite recessionary and be a big job killer. Consumers would cut back dramatically on everyday goods and services, especially "discretionary" spending, many of which (e.g. restaurants) are produced locally rather than imported. "

Damn straight, that is precisely how the consumption tax and subsequent rate hikes here in Japan killed three recoveries in a row.

Posted by: joe on January 23, 2007 at 8:12 AM | PERMALINK

Great idea at first, Kevin, but I have to agree with:

Mobius - small businesses and professionals are already tax-cheat kings for setting themselves up as corporations, limited liability partnerships, and such, and then mixing personal and business assets for deductions. That's how you get personal-use Lexus SUVs for commuting that claim to be "work trucks" and "home offices" that provide internet access and office supplies for the whole family.

One stop-gap is, as suggested, to raise taxes on dividends and capital gains to evenly tax distributions from such personal-use shells, whether as cash, capital, or income. However, by addressing the problem of small-time cheats, you increase the cost of venture capital financing, and also greatly increase the incentive for large corporations to keep their profits instead of distributing them to shareholders.

Since business has to do SOMETHING with that cash, you've just created spurious incentives for otherwise-pointless mergers, acquisitions, and wasteful business investment. Do we need a return to 70's style conglomerates that make everything poorly? The smart path for many large cash-rich firms will be to follow GE or GM and become financing, insurance, and investment funds that also make stuff.

It also suggests absurd new levels of perk-dom as executives seek more un-taxed benefits: corporate apartments in Midtown, more jets boats and drivers, more lavish corporate "retreats". The predictable follow-on effect is that money remains in the corporation sector and is not passed back to investors (except possibly as pay-off junkets for major shareholders)


Also, I agree with A Pilot:

As long as business is regulated by government, business will lobby government. Killing the corporate tax code only kills deductions and credits. Some may be resurrected as pure subsidies (WTO be damned), like farm bailouts. Energy, timber, wireless spectrum, and other public resource users will seek steeper cuts in fees and royalties. A VAT will not be any more immune to tinkering and pork than income taxes: look at sales taxes, which can vary for services, electricity, phones, food, cars, gas, medicine, etc... How about a "business exemption" from the 10% VAT for important "investment goods" - you know, like Lexus SUVs and other "work trucks" That's worth lobbying for...

And, of course, just like we have sales-tax "rebates", business exemptions, and deductions, we'd see VAT deductions and "refundable credits".

Posted by: EthanJ on January 23, 2007 at 8:34 AM | PERMALINK

Taxing capital gains at a higher rate is not a great idea. Investing is risky. Therefore, investing should be encouraged by lower taxation.

If you blithely tax investors, at the least you are alienating political supporters. And at the most, you might be hitting the capital markets with a slegehammer, ultimately lowering everyone's income, hence income taxes, etc.

It is a big, big step to raise capital gains taxes. It is the kind of thing that would alarm all the greybeards.

Posted by: Bob M on January 23, 2007 at 8:47 AM | PERMALINK

It is a big, big step to raise capital gains taxes. It is the kind of thing that would alarm all the greybeards.

Were you freaking out in 2003 when the Republicans started fucking with such a delicate instrument? As it stands, their tax cuts will sunset in 2010 and I suppose the greybeards will be beeping and honking like a thousand car alarms in Manhattan.

Posted by: toast on January 23, 2007 at 8:57 AM | PERMALINK

In 2005, Corporate income taxes (2.3 % of GDP) were $278 Billion out of $2154 total revenues, almost 13% of total revenue.

If you put Social Security off budget ($794 Billion in revenue (2005)), then corporate income tax ($278 Billion / $1359 Billion) is over 20% of General Fund revenue.

Posted by: bakho on January 23, 2007 at 9:07 AM | PERMALINK


What does Al think?

h

Posted by: h on January 23, 2007 at 9:07 AM | PERMALINK

"Businesses don't pay taxes. People pay taxes. The corporate income tax is intended to tax shareholders. It's intended to capture tax revenue from retained earnings. In the process, it does tax dividends twice, once as earnings and again as dividends."

So, if a corporation commits a tort, or breaches a contract, I ought to be able to sue the shareholders, right? Given that, "businesses don't [do X]. People [do X]"?

Like I say, you want to eat your cake and have it too; you want the advantages of recognizing corporations as separate entities, without the drawbacks.

Posted by: rea on January 23, 2007 at 9:09 AM | PERMALINK

There's research in political science to show that this is in fact the pattern among rich countries: more reliance on the VAT, bigger welfare state; more reliance on income taxes, smaller. Think of it as social insurance, not redistribution, so that the regressive aspects of the tax are balanced by the fact that benefits go most to the bottom half of the income distribution. See Jeff Timmons in World Politics.

Posted by: Jim M on January 23, 2007 at 9:10 AM | PERMALINK

To leave the magic kingdom of Wonk for a minute how to sell this - or something like this - in the real world?
My workaround as a libertarian-socialist and not a democratic-socialist is to say fine, sure you can go ahead and increase the size and reach of the most powerful and dangerous organization on earth. Just do this one thing first. Promise us on yr mothers grave and demonstrate with regular full disclosure that you are decreasing the overall size and power of the state.
If you frame it like this and work at it you can not only keep the totalitarian monster of the state under control but split off enough of the Perot/libertarian wing of the GOP to divide-and-rule, without which all is wonkery anyway.
Also look for more savings - esp in defence - before you get all wet and gooey over any new taxes. The way these things are packaged and sold is critical to yr sucess. Don't be a lamer, leftist, loser all yr life Drumstick.

Posted by: professor rat on January 23, 2007 at 9:26 AM | PERMALINK

Why not just raise corporation tax rates? You don't really believe the "double-taxation" bs, do you?

The reason you don't suggest this, I presume, is because corporate taxes are a small percentage of GDP not through intention, but through rampant, quasi-legal cheating. What good would raising their rates do, the logic goes, if they're just going to find more loopholes? This is like declining to enforce spousal abuse laws because abusive husbands will just find further ways to hide it. The point is, these companies are breaking the spirit of the law, and any government with a little spine could easily find a way of getting their share of tax incomes back up to what society intended it to be. The complexity of the corporate tax code is not something that keeps me up at night (while letting these "individuals" get away with paying no taxes actually does!).

Posted by: Ted on January 23, 2007 at 9:35 AM | PERMALINK

Hmmm... a situtation where people pay income tax, but corporations don't.... it costs about $90.00 to incorporate. Most states have done away with requirements of at least 3 directors. In fact most states allow corporations with 1 director.

I could be wrong, but I think you will find a lot small corporations formed with people paying themselves as low a salary as possible and taking the rest in capital gains. Also you can expect a rise in the use of independent contractors and a drop in employees by larger corporations. Expect a drop in social security revenue.

Posted by: molly bloom on January 23, 2007 at 9:35 AM | PERMALINK

The problem with the VAT tax, or almost any taxing scheme, is that reliance on a single method of raising the revenue needed for the large scale necessary to fund government causes huge imbalances (and some certain level of inequity)in the economy.
The advantage of the single taxing method solution seems to be simplification. I think diversified taxing schemes with a lot of tinkering to achieve specific goals is the best approach.

Posted by: coldhotel on January 23, 2007 at 9:35 AM | PERMALINK

While it sounds attractive on the surface, eliminating the corporate income tax would not do much to simplify the tax code. That may sound paradoxical, but most of the complications in the code are there to determine what a corporation's profit is, not how much to tax it. Under any likely scenario, the need to determine this profit will still exist because the profits made by corporations that are not taxed at the corporate level will be taxed at the individual level (either through taxation of dividends or through taxation of undistributed profits -- otherwise a corporation could be used to accumulate wealth that would never be taxed).

There are good reasons to eliminate the corporate income tax, but simplying the tax code, or eliminating the corrupting corporate influence on Congress, are not among them.

Posted by: FelisMajor on January 23, 2007 at 9:36 AM | PERMALINK

For an entertaining illustration of double taxation in action, see this "Tom the Dancing Bug" strip by Ruben Bolling at Salon:

http://www.salon.com/comics/boll/2003/03/27/boll/story.gif

Posted by: Ted on January 23, 2007 at 9:40 AM | PERMALINK

No, Kevin.

Rather than cut the corproate income tax, we should raise the corporate income tax and tax capital gains the same as ordinary income. As others have said, corporations are separate legal entities where people create corporations to evade personal responsibiltiy for their actions. That is the benefit, so there must be a cost. Also, I don't get why someone earning money from interest and dividends is entitled to a lower income tax rate than someone who busts their butt and breaks their back over time building a building. Why there should be a difference between an income tax on wages and one on investment is one no economist has ever satisfactorily explained to me.

Also, Schmitt's assumptions are that there is nothing else to do but tax. Not true, either. Rebuild the nation from within with strong tariff policies and domestic content laws, revitalize unions through labor law reform, and we'll see productivity and employment rise, more people moving to areas that were hollowed out (Midwest, for starters), and we'll see a healthier nation.

We need the revenue because our government needs to perform more services and perform better--as it did in the 1940s through 1960s. Other than that, Schmitt is drinking Bill Bradley Kool Aid.

Posted by: Mitchell Freedman on January 23, 2007 at 9:56 AM | PERMALINK

People have asked (paraphrasing):

Why is reducing consumption a good thing?

Basic economic theory (Macroeconomics 1) has the following basic tenets:

1) Productivity is the gauge for income. The higher the productivity of workers the higher the income.

2) Increases in capital will drive increases in productivity.

3) Increases in capital come from investment.

4) All income must either be invested or spent on consumables.

5) Decreasing consumption will by necessity increase investment.

Thus, increases in taxes on consumption and decreases on investment income will increase investment and decrease consumption. This will increase the productivity of workers, which will increase the real income of workers.

Now, there is a point where a nation can save too much and additional increases investment have smaller and smaller impacts on productivity, but I think most models say we're a long way from that.

Hope this helps,
David

Posted by: David Amann on January 23, 2007 at 9:58 AM | PERMALINK

I'll lob in an idea I heard some time ago... appealing but I haven't thought it all the way through, and I can't remember the proponent.

The idea is a tax on all currency transactions. Its a tiny rate, some hundreths of a percent, but every time money goes into the bank, out of the bank, across banks, etc there is a tiny tax. It has the huge advantage of being hard-wired into the financial system and thus can't be ducked (unless one starts carrying piles of cash around), it is effectively progressive because it doesn't just tax consumption but also transfers of investments (stock sales, etc), has the benefit of "cooling" markets because there is a transaction cost (thus encouraging longer term investments).

This always seemed like a promising approach. Anyone out there know which Professor advocated this?

Posted by: Isaac on January 23, 2007 at 9:58 AM | PERMALINK

The corporate tax is supposed to keep people from "incorporating" themselves and then deferring their taxes. Instead of paying taxes on everything you make as you earn it, you end up only paying taxes as you actually use the money. That kind of indefinite tax deferral can generate huge amounts of money if you just keep the money invested. (It's the economic equivalent of completely uncapping the 401(k) contribution limits--or, if you prefer, of transforming the income tax into a pure consumption tax.) Of course, the corporate tax currently does a fairly cruddy job of it, but preventing massive tax deferral is one of the usual standard arguments for having a corporate tax at all.

Posted by: James Grimmelmann on January 23, 2007 at 9:58 AM | PERMALINK

Finally, some sense in the healthcare debate.

Universal healthcare won't be cheap. But tying it to a defined revenue source -- rather than lumping it in with general federal revenues -- will create a clear understanding in consumers' minds of this tax is for a defined purpose, and help overcome our general aversion to taxes.

Also, by directly tying healthcare to a VAT, you can adjust the VAT rate every year based on the rate of increase in the cost of healthcare. That will help build a constituency for reining in healthcare costs on a national scale, because people will directly see how much it is costing them.

My last point is that while a VAT would not be an appropriate way to fund the overall federal budget, because it is not progressive on a relative basis (that is, wealthier people don't pay a higher percentage of their income than poorer people, as in a progressive income tax), it is a very appropriate way to fund healthcare because it is progressive on an absolute basis (that is, wealthier people pay more dollars than poorer people because they buy more stuff) -- which exactly aligns with how people buy healthcare services (wealthier people pay more on an absolute basis, but not on a relative basis).

To sum up, hooray for the grand bargain!!

Posted by: rosswords on January 23, 2007 at 9:59 AM | PERMALINK

Three points:

1) A VAT does tax profits, so "double taxation" is still in play.

2) As long as we're doing a "grand bargain," why not roll payroll taxes into the VAT too, replacing one regressive tax (that discourages work) with another (that discourages work a little less)?

3) Consumption taxes hit retirees pretty hard, as their pensions will not go up, while the cost of everything else will.

You should read "Taxing Ourselves" by Joel Slemrod for a primer tax wonkery.

Posted by: A-ro on January 23, 2007 at 10:02 AM | PERMALINK

So, if a corporation commits a tort, or breaches a contract, I ought to be able to sue the shareholders, right? Given that, "businesses don't [do X]. People [do X]"?

Um, yes, that is who you sue. Just like you sue the guy who owns the car that ran you over, you sue the people who own the company that exposed you to asbestos.

Posted by: jayackroyd on January 23, 2007 at 10:08 AM | PERMALINK

Expect a drop in social security revenue.

Yes, this is a problem. There's a general problem with defining "income" in any taxation scheme.

Posted by: jayackroyd on January 23, 2007 at 10:09 AM | PERMALINK

Posted by: Doug Page on January 23, 2007 at 7:54 AM:

Why not restore the steeply progressive income tax and eliminate all loopholes...then finance health care and education for all from that?
Beltway guys seem to have become jaded (like Hillary) and limit their vision to what K street says is plausible. Everybody seems to have given up on the 16th Amendment. Reducing corporate and private wealth power by steep progressive taxation, is the only way we wll ever get meaningful voting power for each voter.

Amen. I'm old enough to recall when everything over $100k was taxed at 90%. The govt. was able to build the interstate highway system, startup Nasa, subsidize education, etc. etc.

Let's update this for today's environment and say that everything over $2M is taxed at 75% ... about the rate of JFK's famous tax slash that crackpot conservatives love to hold as an example of sound fiscal policy.

It removes a lot of the greed factor wrt corporate profits and CEO pay ... there's no longer much point in "passing the taxes to the consumer". Build in some corporate tax breaks for investment in infastructure (so long as they purchase from US firms) and for R&D, something that was considered much more important to a company's long-term survival 35 yrs ago than ... say ... stockholder gains. It worked for "The Greatest Generation" and *we* haven't come up with anything better yet!

Posted by: G.Kerby on January 23, 2007 at 10:10 AM | PERMALINK

> Um, yes, that is who you sue.

Um, no, you sue the incorporated entity, not the shareholders personally. That is the entire point of the limited liability corporation. The proponents of the corporation do in fact want to have it both ways: rights of the individual to free speech, contracts, etc, ("corporate personhood" - which was only created around 1880) and total shield from individual liability except for a few scapegoats ("the officers").

Cranky

Posted by: Cranky Observer on January 23, 2007 at 10:15 AM | PERMALINK

Interesting ideas and discussion here.

One thing I'd like to see clarified is the differene between corportate income tax and VAT.

"Of course they are VERY different" everyone yells.

But look at the details (and please spare me the overly simplistic examples):

(income - expenses) * rate = income tax

(income - expenses) * rate = VAT

the real difference is what gets included in the 'income' and what gets included in the 'expenses'.
Are dividends distributed to shareholders an 'expense'? Interest? Salaries and benefits? Depreciation? Raw materials are expenses for both. Income from sale of products/services are income for both. Really, if the difference between the two is just some items that are/aren't counted as expenses or income, then it should both be easy to make the change and of arguable utility.

By the way, here's my own wacky, unworkable idea: make capital gains taxes on securities easy and transparant: whenever you sell a security, there's a flat X% tax on the proceeds. But when you *buy* a security, you get a X% *bonus*. Presto, no more keeping purchase paperwork for years until a stock is sold, etc.

That "bonus" would be a huge boost to the stock market, but a significant expense to start with. So let's wait until a democrat is in the whitehouse and dealing with the bad GOP-induced recessionary hangover.

Posted by: Grumpy Physicist on January 23, 2007 at 10:26 AM | PERMALINK

"Um, yes, that is who you sue. Just like you sue the guy who owns the car that ran you over, you sue the people who own the company that exposed you to asbestos."

Don't know much about the law, do you?

Posted by: rea on January 23, 2007 at 10:26 AM | PERMALINK

One problem with this proposal is that it would create an enormous incentive for corporations not to dividend. The retained earnings would increase the stock price, which would allow each shareholder to time his taxable event (i.e. sale). Without a corporate income tax, the corporation could act like a 401(K), providing a shelter for tax-deferred investments. A shareholder could obtain cash by borrowing against the shares, without incurring the tax burden. I think you would get a lot more inefficient conglomorates (the old ITT) and lower tax revenue.

This also would put a lot more pressure on the estate tax. Currently, stock gets a stepped-up basis upon the death of its owner. This takes a serious bite out of capital gains taxes, but a portion of the money is recaptured through the estate tax. If the repeal of the estate tax is made permanent, then it would allow virtually all stock appreciation by those wealthy enough to do estate planning to escape taxation.

Posted by: Ephus on January 23, 2007 at 10:31 AM | PERMALINK

We're talking about the biggest entitlement program ever, a huge addition to mandatory expenditures that currently account for over half the federal budget, our political class hasn't exactly been honest about the true cost of medical programs in the past (and before you say republican's prescription drugs don't forget democrat's Medicare), and all we're doing is fiddling with taxes? If we're really interested in fiscal responsibility what about deep deep cuts in current discretionary expenditures? Taking a long hard look at the overall utility of most cabinet departments (HUD, HHS, Labor, Commerce, Transportation, Energy), running a fine tooth comb over the few that are absolutely necessary (Defense, Justice), and going to town on the myriad acronym agencies and programs. Because if an entitlement program of this magnitude is going to be "paid for" through taxes based on present day estimates of costs, well we're juts kidding ourselves twice over.

Posted by: scouser on January 23, 2007 at 10:40 AM | PERMALINK

Like always, we should be careful to use tax policy to move the economy in the way we think it should go.

Crank up the taxes on capital gains. Cut the taxes on dividends. Remove the corporate income tax and replace it with a tax on wealth on hand (including non-industry stocks and bonds) (up to about 25%), with a half deduction for dividends paid

Encourage buy and hold investing, the payment of strong dividends over speculation. As well, encourage investment money to go more into actual investment than playing the markets.

Posted by: Karmakin on January 23, 2007 at 10:45 AM | PERMALINK

Just like you sue the guy who owns the car that ran you over, you sue the people who own the company that exposed you to asbestos.

I take it that you are unfamiliar with the term "corporate veil".

Posted by: Disputo on January 23, 2007 at 10:50 AM | PERMALINK

I've been on this bandwagon for years.

Eliminating the corporate income tax would get rid of a huge headache and would be good for business. More cash flow for wages, investment, less reliance on capital markets, enhanced competitiveness. Also no corporate taxes would give companies less incentive to pile on debt (which is deductible) and would lead to more balanced capital structues, and lower default and bankruptcy rates.

As an offset - I would raise the income tax rates on dividends and capital gains and align with the idea that ALL sources of income - wages, investment income should be taxed at the same marginal rates. I would also increase marginal rates to the Clinton years.

I would NOT make this a quid pro quo and use the money to fund universal health care - I support that two but I believe the tax reform is good on its own merits. I would also stay away from a VAT if possible as that would be tougher to sell and is regressive to low income levels.

Finally, politically, I agree with Kevin. Talk about outflanking the GOP and making corporate America an offer they can't refuse. What a coup! And it's good policy too!

Posted by: David68 on January 23, 2007 at 10:57 AM | PERMALINK

Canada has recently put the kybosh on the idea of removing taxation from corporations. It was tried by allowing corporations to convert to what were known as Income Trusts, in which the untaxed profits of a corporation would either flow through into the hands of investors, or be retained for future corporate development. Investors (especially seniors who depend on income) loved this because yields on their investments were high - upwards of 10% in many cases. These yields were then taxed in the hands of the investor, at a very favorable rate.

The Canadian govt stopped this conversion to Trusts when two big corps recently announced they were converting - Bell Canada and Telus Communications. They were stopped, and regulations brought forward requiring existing trusts to convert back to corporations. Why? Because the govt was losing a huge amount of corporate tax revenue, which wasn't being replaced by the taxation on the payouts to investors. Seniors went ballistic because their income streams have been severely cut, at a time when yields from bonds, normal corporate stocks, etc have been dropping to low levels.

Politically the move may have been suicidal for Stephen Harper's conservative govt. Seniors are banding together to bring them down when the next election is called, probably later this year.

Posted by: Dilbert on January 23, 2007 at 11:08 AM | PERMALINK

I like the idea of doing all we can do to encourage the payment of dividends. Payment of dividends leads to better corporate governance, and more money in the hands of shareholders (including most importantly pension funds and IRAs.) It is just harder to fake a dividend than an obscure accounting showing a paper profit. Either a corporation has the jack to pay a dividend or it doesn't.

An enforced but relatively simple excess profits tax (replacing the corporate income tax) would do wonders to encourage the payment of dividends.

Posted by: Ron Byers on January 23, 2007 at 11:11 AM | PERMALINK

"Every political party that has introduced a VAT in modern times has been politically extincted."

In 1979 Thatcher raised the VAT in the UK from 8% to 15%. The Tories continued in power for 18 years afterwards.

Posted by: No Longer a Urinated State of America on January 23, 2007 at 11:13 AM | PERMALINK

I'm a CPA. Changes to the tax structure are notirioucly difficult to implement. TEFRA circa 1986 is a prime example. The entire Internal Revenue Code was rewritten, but the idea then to drastically reduce deductions while reducing the marginal tax rates turned into a sham. The biggest reason is that Congress (of any party) views the tax code as a way to implement its policies.

Many things look good in academia (and this is no exception). The devil is in the details. Interest groups will kill any serious change to our method of taxation. I predict there will be incremental changes around the edges to the system we have today.

Posted by: Robert on January 23, 2007 at 11:18 AM | PERMALINK

Kevin;
I completely agree. No corporate taxes.

This has always been my position.

But let's cut a deal here, shall we? If there's no taxation, then there ought to be no representation.

Therefore, NO CORPORATE CAMPAIGN FINANCING.

And while we're at it, restore the media fairness doctrine rules.

I think we can cut a deal on this that both sides (Republicans and Democrats - the voters, not the politicians) can agree to.

But the politicians will never go for it - how can they peddle influence if they have no influence?

Posted by: Extradite Rumsfeld on January 23, 2007 at 11:31 AM | PERMALINK

Amen. I'm old enough to recall when everything over $100k was taxed at 90%. The govt. was able to build the interstate highway system, startup Nasa, subsidize education, etc. etc.

I think we could perhaps get away with marginal rates in the 45%-50% range, but 90% really would be tough in 2007, because other nations have lowered their marginal rates. In addition, the global competition for talent is a lot fiercer than it was 40 or 50 years ago. We still, of course, manage to spend many billions on the programs you mention above with today's lower rates. To a certain extent, however, what's blocking our ability to spend a lot more on desirable programs is not lack of revenue (although this plays a part) but the growth in entitlement spending. This part, alas, is only likely to get worse with time for the next half century barring a veritable explosion in productivity (or cost-effective medical breakthroughs).

Good ideas, by the way, Kevin. I wonder though, if I'm the only one who things substantive, big-idea reforms are practically impossible these days. One hates to be so cynical and pessimistic, but it seems our political system really is incapable of producing needed reforms.

Posted by: Jasper on January 23, 2007 at 11:38 AM | PERMALINK

But let's cut a deal here, shall we? If there's no taxation, then there ought to be no representation...Therefore, NO CORPORATE CAMPAIGN FINANCING.

Corporations have been barred by law from contributing to federal campaigns since Teddy Roosevelt's day.

Posted by: Jasper on January 23, 2007 at 11:40 AM | PERMALINK

I think we should all keep in mind exactly what a "corporation" has become, at least here in America. Corporations exist as a separate legal entity. They have virtually the same rights as real human beings, (except perhaps the right to vote). But they have a couple of fundamental differences: They have one overriding motivation - to make money for their owners. Despite the odd example to the contrary, most corporations act exactly like a sociopathic bully. They will (and often have) do whatever they legally can - and often what they think they can get away with - all in the name of increased revenue, or strategic advantage, or whatever they want to call it this time.
So, to summarize: here's a group of entities, with far more power than most of us can muster, with literally no morals, no ethics (other than the institutionalized corporate "culture"), and no soul.
And you want to give them a free ride on taxes?

Blue Steel

Posted by: Blue Steel on January 23, 2007 at 11:54 AM | PERMALINK

So, to summarize: here's a group of entities, with far more power than most of us can muster, with literally no morals, no ethics (other than the institutionalized corporate "culture"), and no soul...And you want to give them a free ride on taxes?

They would hardly be given a "free ride" under Kevin's proposal. They would be responsible, as they are now in Scandanavia, for collecting VAT. Moreover, every penny they transfer to their owners (in the form of dividends, capital gains, or executive perks) would be subject to taxation.

Posted by: Jasper on January 23, 2007 at 11:59 AM | PERMALINK

I take it that you are unfamiliar with the term "corporate veil".

No. My point is that if the company's value falls as a result of a lawsuit, then the shareholders bear the burden. There's nobody else to bear the burden.

Posted by: jayackroyd on January 23, 2007 at 12:00 PM | PERMALINK

Big business would lose from this proposal and so would oppose it. Many of the largest corporations now have real tax rates much lower than the nominal rate. Big business can afford the lobbyists and most of the tax loopholes are written for their benefit.

Posted by: Jim Lund on January 23, 2007 at 12:03 PM | PERMALINK

In response to Schmitt:

Conservatives have always been interested in taxing consumption as a way of encouraging savings and investment, and liberals in need of revenue will have no alternative but to reconsider their historical aversion to consumption taxes as regressive.

Yes, if the tax reformers of the future are going to do all that, liberals, who largely are not the people who have made those promises about income taxes (the only one any liberals have attached themselves to is AMT reform), might have to do that.

But then, its not surprising that if conservative policy promises are to be fulfilled, liberals would have to adopt the conservative position that has been attached to those promises.

But why should liberals do that?

While consumption taxes are inherently less fair than a progressive tax on income, there are ways to moderate its unfairness, and if a consumption tax were directly linked to a positive social good -- such as a VAT that pays for universal health care -- the entire package, taken together, would be enormously progressive.

Even if so (and I'd say that's not really true) it would be less progressive than the same program funded from a progressive tax on income.

And no reason has been provided for reducing the role of progressive income taxes except the need to fulfill conservative promises of lower federal income tax rates. Why should liberals want to do that?

Real liberals want to increase the role of progressive income taxes by (e.g.) eliminating the preferential treatment of capital income, not decrease it by transferring the burden to inherently regressive consumption taxes whose regressivity is somewhat "moderated".

If we need more revenue, it makes no sense, and certainly is insane from a progressive perspective, to cut rates in the progressive income tax while increasing rates in a more regressive (even if its inherent regressivity is somehow "moderated") consumption tax. Why, if we need more revenue, should the rich pay less so the poor can both cover the cuts for the rich and provide the additional needed revenue?


Posted by: cmdicely on January 23, 2007 at 12:08 PM | PERMALINK

Some of my rightie friends support the Fair Tax - www.fairtax.org - which is supposedly a nonpartisan effort to replace the income tax with a progressive retail sales tax. It sounds much like what you are proposing. I would be interested in hearing the opinions of progressives about this idea.

Posted by: Dawn on January 23, 2007 at 12:11 PM | PERMALINK

Well, I had suggested doing away with corporate income taxes some time ago, though my idea was to replace them with a tax equalling some percentage of their aggregate value.

Probably not flexible enough to be workable, but they certainly couldn't hide it, either.

Posted by: cld on January 23, 2007 at 12:13 PM | PERMALINK

Sounds like a good plan, although how do these work in a service based economy? I must admit aruba is nice this time of year!

Posted by: madmatt on January 23, 2007 at 12:15 PM | PERMALINK

The major problem with eliminating the corporate income tax is that you would massively increase the amount of corporate income.

A simple example would be someone who is debating whether to form a corporation or a partnership. OBviously, it is a complicated question sometimes. However, if you eliminate the corporate income tax then you have put a huge weight on the corporation side of the scale.

With no corporate income tax then you would decimate personal income tax because you would have a huge incentive to park your funds in a tax-free corporation.

The problem with all income taxes is defining 'taxable income'. If you rely on a sales tax then you have trouble defining a 'sale', etc.

People who lead complicated financial lives will jump through hoops to save on taxes. Since we will still need to raise trillions in revenue then we will still have people trying to avoid and evade the taxes.

The best solution, in my opinion, is to have a lot of smaller taxes. If we have add taxes on carbon, all energy, real estate, VAT, and personal property then we could reduce the personal income tax rates and corporate tax rates so that no single tax would be that onerous and it wouldn't be worth the lawyers and accountants time to evade and avoid them.

If you paid tax on your personal income at a rate of 8% then you wouldn't worry so much if something were deductible. If you pay at a rate of 70% then you will be far more concerned if it is deductible.

Posted by: neil wilson on January 23, 2007 at 12:22 PM | PERMALINK

Politically the move may have been suicidal for Stephen Harper's conservative govt. Seniors are banding together to bring them down when the next election is called, probably later this year.
Posted by: Dilbert on January 23, 2007 at 11:08 AM | PERMALINK

As much as I don't like Harper I have to give him points on this one. It was a tough decision and he did the right thing. The trust law was on the verge of hollowing out all of Canada's large corporations into glorified REITS. No money for innovation. No money for long term investment. Just shareholder payments. Great for the shareholders, god bless em. Good for the economy? No way.

Also the NDP, Liberal, and Block BS in the finance committee trying to move the exemption from 4 years up to 10 is the height of pandering. Who cares if it hurts the economy, we have an election to win. I hope less cynical heads like John McCallum prevail

Posted by: Nemesis on January 23, 2007 at 12:37 PM | PERMALINK

Responding, now, to Kevin:

And as long as we're thinking big, I'll toss out one of my favorite outlandish suggestions: why not abolish the corporate income tax as part of this grand bargain? After all, it doesn't raise all that much money any more (less than 2% of GDP)

Or, in another analysis, right around 10% of federal revenue, hardly an insignificant amount.

it's by far the biggest source of tax complexity we have

Perhaps true, but so what? Its not complexity that effects most people.

it mostly gets passed on to consumers anyway

In the sense that ultimately the money comes from the activity (selling goods) that generates the income, sure. But I don't think this statement is really meaningful.

it's the foundation of all corporate welfare.

And...so? "Corporate welfare" is no more inherently good or bad than regular welfare. Its, ideally, a use of tax policy to advance public priorities. Sometimes it does that, sometimes it is rather more narrowly focussed pork. Destroying the corporate income tax because it enables both would be a textbook example of throwing the baby out with the bathwater.

And the whole thing is used to fund national healthcare (along with the payroll taxes and general fund revenues that are already dedicated to healthcare).

Okay, great, fund national healthcare. But, why do you need to eliminate corporate taxation to do it?

States could be encouraged to follow suit by agreeing to pick up the Medicaid costs of any state that kills its own corporate income tax.

Again, why?

Big business ought to love it. . . . Of course, corporate executives wouldn't much like the idea of higher taxes on investment income.

Executives are not always major capitalists, and major capitalists are not always executives. The people who would like the increase in investment income taxes least are major capitalists, however, the ability to use corporate bodies as giant tax shelters would probably go a long way toward mollifying them. After all, assets held in a closely-held corporation can be as good as personal assets, and making corporations utterly income tax free would encourage those with the resources to arrange their assets that way to use them for just that purpose.

If the corporate income tax were responsible for a significant part of the federal budget, I could see why we'd need to keep it. But in fact it's responsible for no more than a tenth of all federal receipts.

1/10 of all federal receipts is a significant part. Its upward of $200 billion/year; Its particularly significant when you are looking for more revenue, and arguing for an inherently regressive tax to provide that additional revenue.


Posted by: cmdicely on January 23, 2007 at 12:41 PM | PERMALINK
No. My point is that if the company's value falls as a result of a lawsuit, then the shareholders bear the burden. There's nobody else to bear the burden.

The amount of burden shareholders bear is limited to what they have invested; the risk is limited to the assets of the corporation, the other assets of the shareholders are not at risk (normally) even if the corporation incurs greater liability through tort than its assets.

That is where the "you are really suing the shareholders just like you would be suing any other tortfeasor" falls apart; you aren't. They've got a nice big wall between themselves and lawsuits.

Corporate taxes are the price the pay for that special benefit.

Posted by: cmdicely on January 23, 2007 at 12:46 PM | PERMALINK

Just read the Value Added Tax was invented in France.

You know, where John Kerry gets his hair cut.

Posted by: cld on January 23, 2007 at 12:48 PM | PERMALINK

Jasper: Corporations have been barred by law from contributing to federal campaigns since Teddy Roosevelt's day.

Then the PAC was invented (by labor unions actually). By an astounding coincidence many PACs are closely associated with various corporations and industries. Of course the contributions are private and voluntary. Oh, and I'm the Tooth Fairy.

Posted by: alex on January 23, 2007 at 12:56 PM | PERMALINK

Grumpy Physicist: (income - expenses) * rate = VAT

No,

sales * rate - VAT_paid_on_purchases = VAT

Posted by: alex on January 23, 2007 at 1:01 PM | PERMALINK

Grumpy Physicist: (income - expenses) * rate = VAT

No,

sales * rate - VAT_paid_on_purchases = VAT

Posted by: alex on January 23, 2007 at 1:02 PM | PERMALINK

The problem with a VAT is that it costs a lot to collect. Something like 3% of money it brings in. Income taxes, and even sales taxes have a much lower cost.

Posted by: cf on January 23, 2007 at 1:08 PM | PERMALINK

How about, as a very start, working harder to *enforce* our existing tax laws, and allow our tax collectors to do their jobs and go after the largest sources of uncollected taxes.

Estimates are that about 15% of taxes owed are not collected. That would be a huge source of revenue if the IRS wasn't spending its resources chasing possible EITC cheats... It would just about eliminate the current deficit, and the current gap erodes the morale of all of the people who obey the law and pay the taxes that the owe.

Posted by: Alex R on January 23, 2007 at 1:20 PM | PERMALINK

My suggestion is to stop calling it corporate income tax. It's really the government's fee to be allowed to be a corporation. No business has to incorporate--they do so because it has benefits that most businesses find beneficial. And they must consider this benefit valuable since almost all businesses incorporate.

If you're talking about getting rid of this corporate fee then we should also talk about getting rid of the corporate benefits--corporations should pay for benefits just like anyone else.

Posted by: JohnL on January 23, 2007 at 1:43 PM | PERMALINK

1. There's a difference between tax-transparency and no taxation. An LLC is tax-transparent, which means that any profit flows through to the owners and is taxed yearly as part of their own income. What this means is that there is recalculation of the individual owner's basis each year.

2. The drawback with this is if you have a company that grows a lot over a short period of time, you can end up supposedly rich on paper but needing a heck of a lot of cash to pay the taxes on the increase in basis. Sort of like how the housing market would act very differently if people had to pay tax on the increase in the value of their houses each year.

3. Corporations "shield" their investors from this problem because it is only the dividends that have to be declared as income. Increase in the value of the stock doesn't matter until the stock is sold.

Posted by: grumpy realist on January 23, 2007 at 1:45 PM | PERMALINK

Kevin, you're being a HUGE squish again.

Instead, Kevin, this is a GREAT opportunity to call out conservatives/hoist them by their own petard.

Let's give Grover Norquist et al... a corporate FLAT TAX.

The Fortune 500 will shit bricks.

Posted by: SocraticGadfly on January 23, 2007 at 1:55 PM | PERMALINK

As usual, one's actual mileage may vary depending on lots of stuff.

Flat taxers make me laugh. The rate gets all the discussion, but what the rate is applied against makes all the difference. Pitch inheritance and capital gains into the mix and people get feisty. Since I can't personally expect either anytime soon, I feel they are fair game.

Same with the VAT. Include housing sales, stock purchases and legal representation and now it's not so regressive.

BTW, a VAT tends to screw the elderly. They are on a fixed income after years of paying under one system and then suddenly stuff costs more.

And no matter the system, if the current administration writes the tax law we know it will be regressive. Taxes are for working stiffs.

As far as corporate taxes, I have always wondered why some variant of a flat tax with the single exclusion of dividends paid out to shareholders was not the ultimate solution. But of course the question lingers: what the hell would constitute a flat corporate tax?

Posted by: Nat on January 23, 2007 at 2:10 PM | PERMALINK

SocraticGadFly, you and I are evidently sharing some intellectual bandwidth today.

Posted by: Nat on January 23, 2007 at 2:11 PM | PERMALINK

Introducing a flat regressive tax so leftist conservatives can accelerate the rate of return for the wealthy?

You know my position. The militant (conservative?) left is playing the same game the conservative right is playing, shifting the expenses of the wealthy to the poor and middle class with a VAT.

It matters not what you are spending the money for, as soon as I know it is a regressive fee for a variable government service, then I know there will be a rush of the wealthy to get the lower middle class to pay for whatever it is they currently spend their money on.

I warned all of you about this, the conservative left, they are not liberals, they are stalinists, royalists; just like the Republican conservatives.


Posted by: Matt on January 23, 2007 at 2:37 PM | PERMALINK

> A simple example would be someone who is debating
> whether to form a corporation or a partnership.
> OBviously, it is a complicated question sometimes.
> However, if you eliminate the corporate income
> tax then you have put a huge weight on the
> corporation side of the scale.

Really? In my experience, entities in that situation start buying jets, opening offices in Veil and London, leasing Ferraris, etc and charging it off to "expenses".

Cranky

Posted by: Cranky Observer on January 23, 2007 at 2:55 PM | PERMALINK

But I'd be curious to learn why it's a dumb idea.

jayackroyd: The reason it's hard to enact is two-fold. First, Democrats demagogue taxing corporations. They want to tax evil Exxon. Second, corp taxation give them goodies to give away. The very tax breaks Kevin rightly complains about are the bread and butter of an entire DC industry.
...
Abolishing the corporate income tax and making up the revenue by removing loopholes from the personal income tax would go a long way to simplifying the tax code, and would make a significant dent in the ability of Congress to behave corruptly. Or making it up with a BTU or consumption tax. All good.

I agree with Jay Ackroyd: it is a smart idea that is opposed by a lot of smart people because it removes ways for them to exert control over the economy, and ways for them to be seen to be punishing the bad players in the economy.

Most of the Democrats whom I have talked with have opposed eliminating corporate taxes. They have told me that it shifts the tax burden away from rich corporations toward poorer people.

To the individual above who thinks he can avoid taxes by calling himself a corporation, he would still be taxed on his personal compensation from the corporation.

Alex R: How about, as a very start, working harder to *enforce* our existing tax laws, and allow our tax collectors to do their jobs and go after the largest sources of uncollected taxes.

That is a good idea as well. Combined with Jay Ackroyd's recommendation to remove loopholes from the income tax (a la' the 1986 reform) which makes it easier to detect and confirm cheating.

Posted by: calibantwo on January 23, 2007 at 3:41 PM | PERMALINK

Wow Kevin, you sure offered up a hefty plateful here. I don't pretend to have come close to digesting it. In any case, I'm going to offer up a few tentative assertions and probably dumb questions in no rational order because there is so much to cover and it is intertwined:

1) Any change in the tax system should make those who benefited most from the last 27 years suffer the most. Is that even possible?

2)K Street won't go away. The pols need tons of cash for elections. K Street will lobby hard for exemptions or deductions for their clients, probably in a short time eliminating any class fairness alluded to in 1) that managed to sneak into the original program.

3)Unless the program is implemented as a whole(highly unlikely of course) the portions negatively affecting the lower class will come first and the rest may not come at all.

4) Since the American consumer economy runs the global engine wont VAT cause a worldwide recession? Isn't this a de facto tariff?

5) Savings and investment incentives must surely be focused on creating alternative energy structures and mass transit.

6) If VAT is applied at checkout, will the upper half be able to buy their big ticket items off shore and avoid it?

7)Without first making our system of government more democratic and less susceptible to bribery, the prospects for anything remotely close to a fair transformation are exceedingly dim.

Posted by: Michael7843853 G-O in 08! on January 23, 2007 at 3:47 PM | PERMALINK

not there: CARBON TAX. That's the biggest part of the problem; that's what needs to be taxed -- progressively higher over time. Rising real prices will provide both the dissincentive to produce/use and the economic incentive for alternatives.
...
Mercury tax? Methane tax?

Taxing effluents has been proposed. Unfortunately, it gets called a "license to pollute", so it is opposed. Besides, it is difficult to get reliable independent estimates of the amount of pollution emitted. The carbon tax is easier to implement because the carbon is bought in the fuel, and for that there are records maintained by buyer and seller; still some scope for cheating, but it can't all be hidden.

Posted by: calibantwo on January 23, 2007 at 3:48 PM | PERMALINK

What's wrong with your idea is that corporations will become bigger, richer and more powerful. They could then control our politics even more than they do now.

I have a different, and also unusual approach. All corporations should be chartered by the federal government. Each year they should pay a fee based on their gross income - not profit; the fee rate would be higher for higher gross income. No need for all the income tax complications.

Posted by: Paul Siegel on January 23, 2007 at 3:54 PM | PERMALINK

cmdicely: "Corporate welfare" is no more inherently good or bad than regular welfare. Its, ideally, a use of tax policy to advance public priorities. Sometimes it does that, sometimes it is rather more narrowly focussed pork. Destroying the corporate income tax because it enables both would be a textbook example of throwing the baby out with the bathwater.

This is an example of what I wrote: smart people support the idea of maintaining corporate taxes in order to maintain this tool of control over the economy. To me, subsidies are both more efficient and more transparent than tax breaks, if actual control is the real goal. There are a lot of people who favor, and who benefit from, the inefficiency and lack of tranparency that results from using the tax code to implement industrial policy. There are people who prefer tax breaks over subsidies because the tax break allows the company to keep more of the money it has earned, whereas the subsidy is more obviously a transfer from other tax payers. Put differently, the tax break is intermediate between no industrial policy and a clear and forceful industrial policy. Such an intermediate strategy is frequently implemented where a pure strategy is objectionable to a majority who have different reasons to be in opposition.

Thus, I think that eliminating corporate taxes is on balance a good idea, but there are many people who are opposed, like cmdicely, and their reasons are neither obviously false nor inherently unpersuasive.

Posted by: calibantwo on January 23, 2007 at 4:08 PM | PERMALINK
This is an example of what I wrote: smart people support the idea of maintaining corporate taxes in order to maintain this tool of control over the economy.

Well, that's not quite my position (though I can see how you came to it). I think that eliminating corporate taxes as a blunt instrument to end corporate welfare is a bad idea (as I said), but I don't think that the incentives possible through select breaks in the tax system are the reason to maintain corporate taxes; rather, I think that corporate taxes are inherently a fee one pays for the special privilege of corporate protections, and a tool to prevent corporations from serving as tax shelters, and that's why to keep corporate taxes.

Posted by: cmdicely on January 23, 2007 at 5:20 PM | PERMALINK

Kevin,

You could get a similar complexity-reducing effect simply by taxing GAAP earning, rather than having to calculate separate tax-basis earning.

My preference would be to tax undistributed GAAP earnings at the highest individual rate. Dividends count as income, capital gains don't (they've been taxed as retained earnings). This system would be very easy to comply with and enable tax-sheltered accoutns (401-k's, IRAs) to work as intended.

Posted by: SamChevre on January 23, 2007 at 5:49 PM | PERMALINK

1) TAX All Income/Capital Gains, etc. at same rate with very few deductions, perhaps progressively and Require re-evaluation of investments each 5 years to allow capital gains to be realized and thus taxed. (this sort of "replaces" the Estate taxes) then: Eliminate all corporate taxes, Social Security taxes, and Estate taxes (though I like the idea of reducing un-earned wealth).

2) The studies that I see indicate that if we include the actual taxes, deductions... we do have a reasonably flat tax now, so with proper very low earned income tax credits, I'd suggest a flat tax on all income, gains...

3) If we as a government want to encurage activities, Charity, Education, etc., let us do it directly via partial matching funds to ALL rather than as Deductions that help the Richer more than the Poorer and whose costs are clearly identifiable.

4) I note that this discussion is 160+ comments long, it points out the need to have some more "logical" structure so that people can comment, comment on comments without reading all the other suggestions.

Posted by: Mike Liveright on January 23, 2007 at 6:08 PM | PERMALINK

cmdicely, I don't want to misrepresent your view, but consider this: I think that corporate taxes are inherently a fee one pays for the special privilege of corporate protections,


How is that different from a tool to control the economy? maybe you are shying away from calling it "control"?

Posted by: calibantwo on January 23, 2007 at 7:59 PM | PERMALINK

The great liberal economist, public servant and professor John Kenneth Galbriath proposed eliminating the corporate income tax in the 1960's I believe. As I remember he viewed it as double taxation and regressive in effect. He was a great man and an his ideas are worth re-examining. The idea was in one of his books.

Posted by: George L Tyrebitter on January 23, 2007 at 9:13 PM | PERMALINK

"Taxing capital gains at a higher rate is not a great idea. Investing is risky. Therefore, investing should be encouraged by lower taxation. "

Fortunately the tax code as it is now recognizes this and allows a number of interesting accounting 'tricks'.
For example, lets say this year I invest in a project and I loose money. Now if this was supposed to happen its called a tax shelter. but those loses are no longer allowed...
anyway, when your investment finally hits you can offset your succesfull year by restating previous years taxes and offset gains by earlier losses. within the same investment. and you can do this up to either two or three years.

as for the general notion that "investment is risky" I got a rebuttal: "the rich get richer". do you think they are getting richer becouse they avoid investment?

Posted by: Aaron on January 23, 2007 at 9:33 PM | PERMALINK

Tax income, and folks will jump through hoops to avoid income.

Tax sales, and folks will find elaborate ways to avoid, or defer sales.

The crux of the matter, I think, is to tax 'something' that cannot easily be shifted around, or hidden. ...but What?

The idea of taxing transactions is attractive, but then it's a good bet that folks with much money to move around, would soon move it all off-shore ...

Posted by: ldb on January 24, 2007 at 4:41 AM | PERMALINK

Kevin,

Lets keep the issues of healthcare and tax reform separate. If you are going to reform the tax code to fund your healthcare ideas, it is wise to do the tax reform first so that all the mechanisms are in place when you need to raise the revenue for your government run healthcare.

Overall, as a grand bargain, I would have to decline.

However, there are good pieces here. Eliminating the corporate tax and making all personal income equal for taxing purposes is not only a good idea, but one I have proposed here on more than one occasion. I would go one step further and make all inheritances, even charitable bequeaths, taxable as income to the recipient. In addition, I would eliminate the payroll tax altogether and make up the difference by raising income tax rates.

A VAT, or even a national sales tax, is a bad idea. A VAT, in particular is one of the most hidden of taxes. Taxes should be open and obvious to those who pay them, real living people.

I doubt your assertion that elimination of the corporate tax would destroy K Street. Government still would have enormous amounts of power over businesses, and the businesses would thus still have incentive to influence legislation.

Posted by: Yancey Ward on January 24, 2007 at 11:19 AM | PERMALINK
Taxing capital gains at a higher rate is not a great idea. Investing is risky.

So for many people is making a living through labor, so that doesn't justify a need for preferential taxes on capital. The only logical justification for reduced taxes on capital gains, and then only for long-term gains, is that treating all gains as earned income when realized in a progressive tax system unfairly treats capital income that is "earned" over a long period as if it were simply a sudden windfall, which is arguably unfair.

But its easier, and avoids unduly preferencing capital income, to allow income (capital or otherwise) to simply be recognized for tax purpose in advance, anticipating later realization.

Posted by: cmdicely on January 24, 2007 at 2:47 PM | PERMALINK




 

 

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