The Incidence of the Corporate Income Tax

by Dave Schuler on February 20, 2013

Bruce Bartlett has an interesting post on the incidence of the corporate income tax over at the NYT Economix blog. Among the candidates he considers are consumers, shareholders, and workers. Here’s his conclusion:

Finally, four Treasury Department economists detail the method the Treasury uses to allocate the corporate tax in distribution tables. They have the advantage of access to actual corporate tax returns and far greater detail on corporate finances than available to private researchers.

The Treasury economists conclude that 82 percent of the corporate tax falls on capital and 18 percent on labor. This is very close to the methodology of the private Tax Policy Center, whose analyses are frequently cited in policy debates. It assumes that 80 percent of the corporate tax is borne by capital and 20 percent by labor.

One thing not mentioned by Mr. Bartlett is that not all C corporations are on an equal footing with respect to their tax bills. Just as the effective tax rate of the top .1% of earners is significantly lower than the nominal rate, e.g. Warren Buffett’s effective tax rate is 11.6% compared with the nominal topmost personal income tax rate of 39.6%, the very largest corporations pay a lot less of their income than smaller ones do. General Electric, for example, has a tax department of 1,000 people and lobbies aggressively. Consequently, it has an effective global tax rate of 9% and, by some accounts, a U. S. effective tax rate of 0. Those aren’t alternatives open to smaller companies, whose tax department consists of the president of the company and whose lobbying efforts consist of occasional calls to its Congressman and, possibly, a small political donation or two. In other words GE’s smaller competitors probably pay taxes while GE does not. The tax code is, therefore, a competitive advantage to GE.

Taxing capital and labor does not encourage new job formation. If anything, it discourages it. Taking the corporate income tax as an article of faith requires:

  • Animus against shareholders and workers.
  • Indifference to shareholders and workers in the light of all of the grand things the federal government will do with the money.< ?li>
  • Animus against small companies.
  • Animus against new companies (more likely to produce new jobs).
  • Indifference to small or new companies in the light, etc.
  • Fondness for the largest companies. The largest companies have been shedding jobs at a furious rate for the last several decades.
  • Ignorance
  • Some combination of the above.

One thing I think was can say with some confidence is that wanting to increase the corporate income tax on the one hand while wanting to create more jobs on the other is cognitive dissonance at the very least.

More efficient would be abolishing the corporate income tax and adding a new, higher multi-millionaire bracket for individuals with incomes of more than $10 million per year. More efficient yet would be abolishing both the corporate and individual income tax and imposing a consumption tax.

{ 7 trackbacks }

Trevor Loudon's New Zeal Blog » Watcher’s Council Nominations – Sequestration Boogie Man Edition… Boo!
February 27, 2013 at 11:54 am
Watcher’s Council Nominations – Sequestration Boogie Man Edition… Boo! | askmarion
February 27, 2013 at 1:01 pm
Watcher’s Council Nominations – Sequestration Boogie Man Edition … Boo! | therightplanet.com
February 27, 2013 at 2:00 pm
This Week’s Watcher’s Council Nominations | therightplanet.com
February 27, 2013 at 2:02 pm
Watcher’s Council Nominations – Sequestration Boogie Man Edition..Boo! » Virginia Right!
February 28, 2013 at 5:29 pm
Bookworm Room » Watcher’s Council nominations for the end of February 2013
February 28, 2013 at 6:12 pm
Written Egg Foo Young |
February 28, 2013 at 10:00 pm

{ 10 comments… read them below or add one }

sam February 20, 2013 at 8:31 am

“More efficient yet would be abolishing both the corporate and individual income tax and imposing a consumption tax.”

Once again, I no problem with any of that. However, in your vision of the tax, would things like food, clothing, and maybe medical care be exempt from the tax? Or, alternatively, would the tax be so low that taxing those things would not impose a heavy burden on lower-income folks?

Dave Schuler February 20, 2013 at 8:40 am

However, in your vision of the tax, would things like food, clothing, and maybe medical care be exempt from the tax?

There are any number of possible alternatives. One possibility is exempting some things. A better one is issuing tax refunds on a monthly basis based on reported income. You can achieve the effect of a graduated tax with measures along those lines.

I don’t know of any estimate of the rate that would be necessary for a plain sales tax that would replace the income taxes that’s not well into the double digits, in the 20-25% range. VATs can be lower. That tends to reduce the attraction of fraud.

There is a problem with any major change in the tax code. Who likes the system as it is? Who would most strongly oppose a perfect, simple, fair, and unavoidable system? Warren Buffett and GE.

Icepick February 20, 2013 at 1:46 pm

Thank you, Schuler, for this post. Most of these particulars are things I’ve railed about since the time before blogs. (Honestly, I didn’t understand how the code is manipulated by the large corporations to screw competition until I had worked in the actuarial field for a couple of years. Experience is a great teacher.) Not that it’s done me any good. Not that this will do any good.

All such proposals at changing the tax code create massive anti-reform screaming fits from Dems, especially. (Republican mainstreamers don’t usually have fits, but this is why they’re unhappy with the Tea Partiers. A decent tax code cuts out the need for lobbyists to give them money.)

Locally we’ve had a couple of Congressional candidates run on the Fair Tax, which is largely what you describe in the third sentence of your comment. Needless to say, the Dems have run against these people claiming they’re out to fuck over the little guys to make rich people happy. Funny to see these Dems run those ads in conjunction with PAC money from George Soros.

Reform is going to be impossible until the whole system crashes. By then it won’t matter.

Icepick February 20, 2013 at 1:48 pm

Yeah, and the really beautiful thing about Buffet is that he will hardly pay anything into Social Security, as a portion of his income, because of the cap. Effectively almost all the people working for him are going to pay a higher tax rate, when FICA is factored in.

Dave Schuler February 20, 2013 at 1:51 pm

Funny to see these Dems run those ads in conjunction with PAC money from George Soros.

I think it’s important to remember who George Soros is. He’s not just a very rich guy with a specific view of how the world should be organized. He’s a currency trader. Currency traders thrive on chaos. A world in which there’s one currency (say, the dollar) is death to a currency trader.

Icepick February 20, 2013 at 2:00 pm

Currency traders thrive on chaos. A world in which there’s one currency (say, the dollar) is death to a currency trader.

Yeah, but is heart is really with the little guy. Truly!

steve February 20, 2013 at 3:24 pm

Think of all the money GE spent on avoiding those taxes. Think of all those tax attorneys making a fortune. Just eliminate the corporate income tax. I like the idea of a consumption tax, but we dont do big change well or often. Stay with an income tax increase and increase the death tax.

Steve

Steve Verdon February 20, 2013 at 4:53 pm

Reform is going to be impossible until the whole system crashes. By then it won’t matter.

Pretty much my feeling.

Icepick, you should really try Robert Higgs. You should like this one.

Icepick February 20, 2013 at 8:18 pm

Steve V., have you read any Turchin? His work seems to indicate something nasty is coming, but his work is a field in its infancy, too.

Drew February 20, 2013 at 9:25 pm

I would add to the potential incidence suppliers. (And then how is that spread?) The implicit assumption is that passing tax costs through to suppliers or customers is hard, given competitive dynamics. That brings another variable into play: market power.

I’m generally a Bartlett fan, but highly suspect of the result, especially in light of Dave’s observation about incidence on capital by corporate size – and then I’d add incidence cut by market power.

The left largely of course would like to believe the majority of incidence is on capital. That would be a more viable assumption in tight labor markets. As in not now. It also begs the question as to why businesses are leaving in droves in states like CA, IL, NJ, NY, etc. Think of the costs to move. Yet business is leaving. How much labor can afford to move?

The lesson is simple. Keep the size of government small, and therefore within tolerance for capital or labor to fund, and without regulatory capture. But once you decide you just want the least productive sector of society spending willy-nilly, you will have these attendant problems. Witness Europe, CA, IL………

Leave a Comment

Previous post:

Next post: