Left As An Exercise Post of the Day
Economists’s claims that taxes should not be paid by corporations is based on the premise that government should be relatively inefficient and/or run a deficit in perpetuity.
Discuss.
Economists’s claims that taxes should not be paid by corporations is based on the premise that government should be relatively inefficient and/or run a deficit in perpetuity.
Discuss.
They should be taxed on INCOME like everyone else!
(as opposed to PROFITS)
As juxtaposed against the supreme court decision (next message) which declares that corporatiojns are people, for free speech purposes, what other argument remains that corporations should not be taxed? The classic argument has been that corporations are not people, and thus corporate taxes are double taxation.
Ken,
What does corporate tax rates have to do with the government being inefficient or running a deficit???
Discuss what? Corporate tax rates? Governemnt inefficientcy? or Governments running deficits?
They are mutually exclusive topics…
Islam will change
huh?
What economists? What claims? Clarify.
He who makes the rules about what should be counted as income, profits, and losses rules the world. Now, tell me how very very rich corporations are contributing to society’s long-term economic stability if they don’t contribute anything in taxes? Wouldn’t it be a good idea to change the rules for what and how much gets taxed now? NancyO
I think the best case for corporate taxation was made back in the early 30s by Berle and Means in their classic The Modern Corporation and Private Property. Modern corporations, they argue, have divorced the attributes of traditional ownership in that ownership is completely unrelated to control. When 100,000 people share ownership, the control of the corporation is completely in the hands of the managers. Meanwhile, corporations, as government chartered collectives, are given a large number of rights and benefits such as limited liability, financial agency, and standing in court. High corporate taxes, they argued made the government an implicit partner, and as such, placed constraints on what management could do with the corporation. It makes for very interesting reading, especially lately.
We’ve seen what happens when corporate taxes are lowered. The management uses the collective as a private piggy bank without restraint by the collective’s owners, its employees or the government. The collectives become less innovative and contribute less to economic growth.
One argument (from the OECD) is that the deadweight costs of corporation taxes are higher than those of other taxes: like, say, consumption taxes or property taxes. Thus, whatever level of revenue you want to collect, more should come from property and consumption taxes than from corporation taxes.
However, there’s a much stronger argument. It isn’t that economists say corporations *shouldn’t* pay taxes. It’s that corporations *do not* pay taxes, indeed *cannot*.
They may hand over the check but the actual incidence of the tax is upon some human being somewhere. If that incidence were entirely or even largely upon the shareholders then most wouldn’t mind. But the general finding for the US is that about 70% (from the CBO) of the incidence is actually upon workers in the form of lower wages.
So the argument actually becomes: we levy corporate income taxes and thus think that it’s the corporations paying the tax. But it isn’t, the real effect is the lowering of the workers’ wages. This isn’t actually what we want to do, lowering the workers’ wages. So perhaps we shouldn’t be levying this tax?
Tim Worstall,
Human beings do not pay taxes. In fact, they cannot. Every dime you take away from a person in taxes is money they cannot and will not spend on stuff which they buy from corporations. By taxing people, you are essentially lowering corporate profits. The real effect is lowering workers’ wages and shareholder’s income.
While the above paragraph sounds nonsensical, with all due respect, the logic is the same in the argument you make. The fact that its been used over and over and over one way and not the other is the only reason it sounds silly when stated in a slightly novel fashion and yet serious when stated the traditional way.
You cannot “tax” any entity, other than “people”. Visualize the hierarchy any way you like.. model it to fit your message.. doesn’t matter. The ultimate bottom of the wealth flow, is a person.
The simple argument that corporations are just tax conduits, is simple truth. One way or another, a person ends up bearing the tax burden… be it the owner(s) in the form of a company’s lowered net worth (or lowered dividends), or be it the customer; who pays that tax as surely as a renter pays the land-lord’s property tax.
Contruct the model of your choice, and it can be proved, that any way you slice it.. any tax lowers net-wealth, on a personal level.
Mike, are you really trying to suggest that corporations do bear the tax incidence?
Seriously? Are you able to find anything, in any econ textbook at all, which might back up your idea?
From a previous thread on tax incidence at Thoma’s.
Isn’t it obvious that the ultimate payment of all taxes falls always and only on the workers?
Take a business — any business — and watch what happens when you remove the workers. Zero productivity, and a factory full of moths and dust.
The shell game here is NOT whether business or workers pay more taxes — it is instead what proportion of productivity is returned to the people who have created both the supply and the demand streams which businesses skim for their own sustenance. This isn’t a matter of solid numbers, but of a baseline of sufficient payback to workers and the company to sustain them in health and comfort, and a fair share-out of the remaining profits.
When business’s proportion of the skim becomes so large that worker/consumers do not have access to the fruits of their own productivity, the economy becomes inert.
Businesses are best thought of as animals – smart enough to maneuver for short-term feasts regardless of long term implications. Like cattle on a farm, they’re always trying to break down the wall to the seed bin. They have done so over the past 30 years, and now they wonder why the fields are barren.
But unlike cattle, businesses have no independent existence. They’re like Tamagotchi digital pets, created, nurtured and defined by human beings. In fussing over them, we are in a weird situation of deferring our social well-being in order to make invisible pets glossy and fat.
Noni
http://economistsview.typepad.com/economistsview/2010/08/the-economics-of-tax-incidence.html and noni’s
john Lansing:
Steve Gordon’s simple incidence model ignores issues that produce a different conclusions.
The claim that a small country’s corporate tax falls entirely on labor is not correct for:
(a)extractive industries where the company owns the resource or has conned (or bribed) the government into setting a low price for extraction rights,
(b) Businesses whose profits are land rents or location rents,
(c) Trading profits and investment earnings of financial firms,
(d)companies with monopoly price setting power (eg. returns on past investments in advertising, intellectual property or bribed officials
I find myself in the odd position of agreeing with buffy. The post is not coherent.
It also has a bunch of stuff inbedded in it that seems tangential, and possibly wrong. Not all economists make the claim. Economists aren’t the only ones who make the claim.
Is the point of the post meant to be the relative efficiency of public sector vs private sector spending? Marginal cost of corporate taxes against marginal benefits of public spending?
Tim,
Reread my comment. I noted that in the end shareholders and employees pay whether you tax corporations or people.
I like perspectives like, Noni’s. They can spawn interesting (and revealing) debates. The chicken ideology, or the egg ideology ? Are factories worthless sans workers, or sans factories, do we even HAVE workers ? The co-dependency is a real as the co-dependency between coporations and government.
— Corps require government-based civil-infrastructure, but without corp-generated wealth to fund it, governments can’t exist–
(unless, of course you’re (she is) suggesting the big ‘S’ word..)
There are as many empirical arguments for socialism, as there are for capitalism.. human nature being either’s biggest problem. Accepting that, I’d suggest the BIG problems stem from trying to have both.
Is the problem that in a $14T GDP, the post-corporate “skim” leaves an average household earning $60,000 ?
Or is the problem that government “skimming” equates to $34,000 of that $60,000 ?
($3.7T fed budget / 110M households)
is it “But the general finding for the US is that about 70% (from the CBO) of the incidence is actually upon workers in the form of lower wages.”
Or is it “But the general finding for the US is that about 70% (from the CBO) of the incidence is actually upon management in the form of lower bonuses.”
I’d be interested in seeing how that skews.
Workers and wages, definitely. The transmission mechansim is as follows. If capital is mobile (and this refers not just to legal matters, but to size of economy, language, all sorts of things over and above what the law says) then higher taxes purporting to be on returns from employing capital will lead to capital mobilising elsewhere where such taxes are not levied.
However, average wages in an economy are determined by average productivity in that economy. And labour productivity is imporved by adding capital to that labour. So, if we’ve less capital being employed then we’ve lower labour productivity and thus lower labour wages.
The transmission mechanism isn’t through the company itself: so it’s not about the division of income between management and workers. It’s at the level of the whole economy employing less capital: so it’s workers’ wages that get it in the neck.
RweTHEREyet – you’re very confused about your numbers again.
MEDIAN houshold income in the United States is about $60,000.
AVERAGE household income in the United States is about $90,000.
You can argue that government “skimming” equates to $34,000 of that $90,000 – it is much more difficult (if not meaningless) to come up with a figure for government expenditures that could compare with median income. You can come up with a median tax burden, or an average tax burden for the median income individual, but how do you factor a median, not average, share of the deficit?
John
Ummm.. per Census, the per-household median is $50,303 .. average # of earners = 1.35 … and per-household average = $63,091
Granted those are 2008 numbers, but if anything, they’ve gone down..
http://www.census.gov/compendia/statab/2011/tables/11s0690.pdf
Despite accusing me of being “confused”, and “confused again” (I’d be interested in seeing my other confusion).. I’ll humor you and ask you what is meaningless about comparing a per-household of the budget, to a per-household income ?
I think it’s a good reference REGARDLESS who’s number we use (yours or mine).
The deficit is a non-issue. That’s just the difference between receipts and the budget. All I’m pointing out is the spending in total (borrowed or otherwise), as a per-household share.
Remember.. income tax is just the begining.. That $34,000 goes way beyond income tax.. it includes all the other taxes (ie corporate), that a household ends up paying, one way or another.
Tim Worstall,
Obviously not. I was pointing out that regardless of who you tax, it gets paid by people who own capital and people who provide labor.
And frankly, I’m not playing the “its in an economic textbook” game. My schtick for he past five years here has been “hey, lookee here. This data completely contradicts what’s in the textbooks on my shelf. Let me try to explain what’s wrong with the theory.”
The second graph in this post (http://www.presimetrics.com/blog/?p=301) is an example of that, and it bears on the topic of who you want to tax directly.
Wow this post is weird but it’s redeemed by comments that are generally quite good. I agree the concepts in the post are unrelated. It is very easy to construct a model of taxation in which C Corps are untaxed that does not result in any decrease in government efficeincy or revenue.
I study the firm and am not a big “corporate tax falls on labor” fan. I think it’s really indeterminate in the complex real world. I am not going to clog this blog with what is a dissertation length exposition of that sentence but that is what I hold to.
I also believe the data disprove the Berle and Means thesis which reflects a world of 75 years ago. There are many publicly traded untaxed entities with widely dispersed ownership — mutual funds, REITs, MLPs, etc. etc. Conversely there are many corporations with less dispersed ownership, privately held ones etc. And then there are the closely held pass throughs (S Corps, LLC, professional partnerships) which are a very large portion of the entities in the US.
It must be remembered that among the largest corporations, much of the ownership of their equity is held by pension plans which are untaxed and also vehicles for tax deferral. Yet no one suggests taxing pension plans on dividend and interest income.
I think all the other models are superior to the C corp , as evidenced by the fact that no one complaiins about them from either perspective. Simply stated, if the corporation is a vehicle for its owners, then the logical tax approach is to disregard the corporation and pass the tax matters through to the owners. Mutual funds ahve to pass through all net income every year, REITS have to pass through 90% etc. The REIT model is better for an operating business obviously.
But this also means depreciation, losses etc get passed through as well. These however can be added or subtracted as the case my be from the basis of the stock and not recognized each year.
This diminished much of the argument for differential treatment of divs from interest and for lower CG rates. So further advances efficiency and equity.
However, fairness then dictates that the limitation on capital losses ssheltering ordinary income shoudl disappear as well which I believe is also fair if the above are implemented
There is nothing meaningless about comparing per-household income with per-household govt spending. The problem lies in confusing median household income with average household income – median and average are two different things.
Average income measures the total personal income divided by the total number of households.
Median income measures the mid-point in the income distribution – 50% of households make more than the median, and 50% make less. In the US, the income distribution is skewed to the upper end, so the median is significantly less than the average.
If you are going to compare the average household share of Federal spending, you have to compare that to the average household share of personal income. Or you can compare median income to median tax burden (again, I don’t . But you can’t accurately compare median income to average household share of spending. It’s apples-to-oranges – that is why I say that it is meaningless to compare per-household median to the the per-household budget.
To find average US household income:
Total Personal Income in 2008 is $12,103 billion. Disposable Personal Income is $10,642 billion. Total number of households = 116 million.
So the AVERAGE household personal income for the United States is
$12,103,000,000,000 / 116,000,000 = $104,336.
Using Disposable Personal Income (which takes out some tax payments) we get $91,741.
Data from:
http://www.census.gov/compendia/statab/2011/files/income.html
Hmmmm.. If the average household earns ~$104K.. and there are 1.3 earners per household.. your numbers make the personal average of $77K
That doesn’t even look rght.. I dug for more current numbers.. (this is diffcult data to find published)
According the SSA:
http://www.ssa.gov/oact/cola/awidevelop.html
The personal average (2009) is $40,711.61 .. national aggregate (150M workers) = $5,894,035,000,000
Personal X 1.35 workers/household = $54,960
Agregate / 112M households = $52,625 (pretty darn close)
I’m gonna look into what your $12T national total is all about.. because I’d bet a bundle that the personal average is not $77,000..
That chart and the figure you cite above refers to average wages as reported on Employer W2 forms. It does not include dividends, capital gains, income from partnerships, SCorporations and small businesses, and other sources of income which are a large part of total personal income. Wages are not the exclusive source of personal income. If you are going to compare government spending per capita to income, you have to include all of those sources of personal income.
John
Yeah,, that makes sense.. but as I noted, it doesn’t matter which income numbers we use .. I’m not trying to represent a ratio between household income and per-household, federal spending for a given, single year.
The comaparison is for “then/now” .. as a reference (assuming consistent income number method) for how much the federal spending has grown over the years, relative to household income.. We can call it the ‘Rwe’ factor.
Example:
The ‘Rwe’ factor borne by a household in 1960 was 9%
The ‘Rwe’ factor borne by a household in 2010 was OVER 50%
And the creepy thing, is that are FAR more two-income households in 2010
The ‘Rwe’ factor under Obama for TWO years eclipses the ‘Rwe’ factor ANY ten year span, prior.
Incorrect again.
In 1960, federal expenditures per household were:
$92,191,000,000 / 52,799,000 households = $1746/ household.
Median family* income, 1960 = $5620.
Federal expenditures as percent of median family income = 31%.
But again, there is a difference between average income and median income.
Average family income 1960 = $6,691
Federal expenditures as percent of average family income = 26%
Average household income 2008 = 104,000
Federal expenditures as percent of average household income = 33%**
More instructive is to look at the ratio of Average to Median income
Average family income 1960 = $6,691
Median family income 1960 = $5,620
Median as % of Average = 84%
Average household income 2008 (approx) = $104,000
Median household income 2008 (approx) = $51,729
Median as a % of average = 49%
This is why you cannot use median income, or average wages, as the denominator in a ratio of government spending – the median income is a factor of total income and the income distribution. It distorts the data – apples to oranges.
The real issue is that the income of the median family is a significantly lower portion of the total income – or in other words, the wealthy (and if you look at the income distribution in finer detail it is the very wealthy) are capturing a larger and large portion of income, and the rest of us are getting a smaller portion. Government expenditures are not the major shift.
John
*1960s census data uses family rather than and household income interchangably – they aren’t exactly the same, but its close enough for this exercise.
**Using RWEs figure of 34K/household for the federal expenditures, which is really about the 2010 budget, not the 2008 budget, but we’ll use it for lack of final 2010 income figures.