The federal government collected $350 billion from corporations in corporate income taxes last year. Economists have long understood and explain that the US federal (and state) corporate income tax rates are at the same time both too high and too low. Why do we say this? Well, the tax rate is, at the margin, very high – so high that corporations large and small famously expend billions of dollars of resources to avoid paying it. Most famously of course is GE’s 57,000 page return from 2011 on $14 billion of worldwide income. It’s tax bill that year was … zero.
So, the high rate encourages wasteful tax avoidance, and directs resources away from valuable production and into destructive zero-sum efforts to avoid taxes. So the result is that the effective rate collected by the government is “too low.” Now, I’m not a fan of taxing corporations any more or less than other entities. If you agree that the government needs to collect revenues, then we should have a shared interest in not doing so in an incredibly wasteful matter.* Furthermore, it’s not at all clear that “corporations” pay the corporate income tax even when they are not pulling a GE. Well, corporations, I’d hate to inform you, are not people. So, what people pay the corporate income tax? That question is to be answered by tax incidence studies. It must be either the customers of the corporations, the workers at the corporations, the owners of machinery/capital that the corporation employs, or the owners of the corporation itself. Maybe the tax hits a particular group of entrepreneurs – in other words, it discourages firms from incorporating in the first place, meaning we have a riskier, privately held, corporate structure. All people.
What we DO know is that it is NOT at all clear that the “evil capitalists” bear the burden of the corporate income tax – my reading of the literature is that much of it falls on workers, less on consumers. What we DO know is that corporate income tax revenues are a small slice of the government revenue pie. What we DO know is that firms make great efforts to avoid it, and governments spend great resources to enforce it. What we DO know is that the corporate income tax does almost nothing to the progressivity of the tax code, for those of you who care about such things. At the same time, we keep hearing about how important business is to the health of the country. We keep hearing about the creation of new jobs and so forth.
So here’s a radical proposal that should either annoy everyone or have some form of agreement between everyone (which means it can never happen ironically). Rather than tax corporations to get $350 billion per year. I hereby recommend that the U.S. government purchase an ownership stake in all American corporations that it currently wishes to tax. Yes, that sounds a hell of a lot like socialism, and it is. But I don’t see how that’s worse than what we have today (I’d go further and place the regulatory apparatus within each company this way too). We can structure the stakes so that they are passive – ensuring that company insiders maintain control. But the reason I propose this is that you would think a passive government investment in the corporations themselves would actually force them to do things that encourage businesses to be profitable and successful. It wouldn’t matter where businesses located, it wouldn’t matter whom they sold to, and so on, so we would not have to play all of those silly tax hiding and detection games. Instead, the government’s “take” would be either a function of the dividend payments from the corporate sector and/or the increase in the value of the shares that it held over time. I am sure people smarter than me could structure a more passive way for the government to make these investments – such as by purchasing huge index funds in the entire economy, or integrating such an idea into an NGDP futures market.
Last year, the entire corporate sector issued about $1 trillion in dividends. And this number is surely suppressed due to the tax treatment of such dividends. So, to generate $350 billion in annual income from corporations the government wouldn’t have to purchase 35% of each company, somewhat less I think. Of course the entire idea is insane and is precisely what you might predict leads to serious tyranny and oppression in the future for what I think are obvious reasons. But we are talking about changes from the current situation, not what the world would look like if we were designing it from scratch. And for me the tax and regulatory burden of the existing set up is so bad that you may have turned me, at the current margin, into a crazy National Socialist. I’d very much look forward to seeing the populists promote mandated wage legislation, burdensome workplace regulations, costly green-initiatives, etc. when their very own livelihoods are connected to it. Am I stupidly assuming that folks care about their own livelihoods enough to want to see a flourishing and profitable business community by giving everyone a direct shared interest in it? Or do people hate the idea of business and profits so much that they’d want to see all of us sink with the ship? Can we take this even further and end the entire system of taxes we have at all levels and simply have all taxpayers become “investors” in the economy at large?
My last question is not as stupid as you think. If you are an extreme technological optimist and labor market pessimist, that may indeed be the only option we have going forward – think about why.
* On the other hand, if a government can efficiently collect taxes, that may induce them to collect more than we agree they “need” … so blame Milton Friedman for suggesting the idea of automatic payroll deductions.