Ask Mr Grammar Person

What is wrong with this sentence ?

It is true that making the headline corporate income tax rate lower would be a good idea since that might give us a less distortionary tax code,, but in light of the long-term budget crunch that means we need to make up for any rate cuts by closing dividends.

Yes I write about grammar partly as a joke (I don’t joke about spelling — it is too painful). But I am serious. Matthew Yglesias draws a very definite conclusion in the italicized indicative from a claim in the subjunctive. It is always a mistake to say that something “is” true because something else “might” be true. This point is too elementary to be elementary logic.

I think I have something medium serious and almost worth reading on the corporate income tax after the jump.

I’ll get to economics soon, but I only now notice another grammar problem. “closing dividends” doesn’t actually mean anything. I honestly didn’t notice anything odd about the phrase when I read the post and decided to comment on grammar. I read it as meaning “taxing dividends as income, that is reversing the Bush 2003 tax reform under which qualified dividend income is taxed at a 15% rate.” Not only did “closing dividends” seem perfectly clear to me; I didn’t even notice the grammatical slip. This aside might be helpful to those of you who hope that I will ever competently proof read my posts — I can’t.

To be fair to Yglesias, I actually agree with his proposal to reduce taxes on re-invested corporate profits and increase taxes on dividends. But that means that he wants to move away from a simple tax on corporate income, yet he presents the problem as a low ratio of corporate income tax receipts to the product of the headline tax rate times corporate profits.

I am picking on Matthew Yglesias because his confidence that a revenue neutral reduction in tax rates and elimination of loopholes improves efficiency. The claim seems to be that tax expenditures are inefficient and some should be eliminated. I think this claim is exactly as sophisticated and worthy of support as the claim that government spending is inefficient and some should be eliminated. No one likes spending in the abstract — we like the programs we get in exchange for the money. So most US adults want to massively cut Federal Spending and want to increase spending on programs which are responsible for at least 98% of the Federal budget. Identically, no one likes tax expenditures in the abstract, and none of the people who write that most should be eliminated discusses which should be.

Another aside. Many people want to eliminate the mortgage interest deduction and I am one of them. I support taxing especially expensive employer provided health plans as in the PPACA. I oppose the absurd subsidies to oil companies. So I am against some tax expenditures. I also oppose building the F-35 and wasting more money on missile defenses and oppose some federal spending. I don’t consider “cut spending” or “cut tax expenditures” to be useful proposals.

It is often just assumed that a simpler tax code is better and, in particular, that any choices made because of the tax code are inefficient. The same people who generally denounce tax expenditures, propose new tax based incentives including say a carbon tax. Yet somehow the fact that they propose to use the tax code to influence behavior has no effect on their claim that past efforts to use the tax code to influence behavior are worse than worthless. See this post by the very same Matthew Yglesias on the very same day “This is an inefficient outcome, which is why we need taxes and regulation.”

In the corporate tax post, Yglesias suggests shifting taxes from corporate profits to dividends. I agree. He also complains about loopholes in the corporate tax code. One such loophole (a huge one and for all I know the hugest) is the investment tax credit which serves to shift the burden of taxes from re-invested profits to dividends. We could eliminate that loophole, cut the corporate income tax rate and introduce a new flat witholding tax on dividends. This would change precisely exactly nothing. But it would reduce the headline corporate income tax rate without reducing tax revenues (I tried to propose a change such that each and every corporation would have exactly the same tax bill under the reformed system).

I vaguely recall (so no link) the most extreme example of illogic in the cause of tax simplification. Someone argued that we should eliminate corporate tax loopholes in general (mentioning no exceptions) because we want corporations to invest in R%D and hire engineers and not to invest in tax avoidance and hire lawyers and accountants. I claim a fair summary of this argument is the following: To increase corporate investment in R&D we should eliminate, among other things, the R&D tax credit.

I don’t really know much about the corporate tax code, so I will close by discussing a topic on which I am extraordinarily expert — laziness. I think a large part of the reason that commentators hate the complexity of the tax code is that it makes commentary on tax policy much more difficult. The inefficiency which bothers me sometimes is the huge amount of work I would have to put into learning about the tax code if I were to try to discuss its effects on the economy responsibly. Discussing it would be much simpler if it were much simpler.

I don’t think this is a serious consideration. The time and effort of lawyers and accountants aiming to minimize tax liabilities is a social waste and a large one. The time and effort of economists and pundits trying to understand the tax code is a social cost, but it is a small cost.