The Problem of Corporate Income Taxes

This Note is in response to piece by Howard Gleckman on TaxVox by the Tax Policy Center, which you can read at http://www.taxpolicycenter.org/taxvox/would-workers-benefit-corporate-tax-cut-not-much

The corporate income tax was formerly referred to as the corporate profits tax, which made who paid for it obvious. The argument that cutting taxes leads to more investment makes about as much sense as saying that cutting taxes on the wealthy, especially dividends and capital gains, leads to investments that spur the economy and employment is true, but not in a good way, unless massive deficits eat up these cuts as bond purchases. This leads us to wonder, why not raise taxes and increase government purchases and transfer payments instead?

The private sector has only so many solid investment opportunities and unless interest rates are sky rocketing, they are adequately funded, usually in response to increases in aggregate demand. Investments do not drive such demand. I am sure Mr. Mnuchin would never tell a private sector client to invest in plant and equipment without a strong customer base. If he would, Goldmann Sachs is better off without him. But as an Executive Producer, he angeled blockbusters, some of the biggest selling movies in Hollywood history. He did not release that cash because no one had the money to go to the movies.

The reality is that whe the bosses and investors pay lower taxes, they get to keep more money, not from investing but by driving labor costs down through outsourcing, job cuts or keeping more of a share of productivity gains than are given to workers in higher wages. In the last 45 years, wages have increased by 11% of total growth, although productivity rose 73.4%. 62% went to the owners of capital. Prior to 1973 these figures tracked together.  http://www.epi.org/productivity-pay-gap/ That would be how to split the taxes.

Lower wages lead to more consumer debt use and we know what that led to. Lower capital gains taxes led to speculation in housing and Internet start-ups, which were also a key factor in the last three recession, starting from the 1986 tax reform to the Clinton-Gingrich capital gains cuts to the Bush cuts, which tracked to the S&L Crisis, the Tech Bust and the Great Recession.

Of course, the question would be moot if employee-owened corporations and cooperatives were a universal phenomenon. Then the workers are the investors and the investors are the workers. Either way, of course, the tax would be paid by the consumer. Of course, if the consumer were also the members of the cooperative and they provided all government social and educational services (including mental healthcare for criminals), as well as their own infrastructure and public safety, then there would be little taxpaying going on at all. Any that did occur would be funded from a Subtraction VAT (with off-sets for providing those services) and a land value tax to compensate people who are left out of the cooperative system, who would simly buy services from the cooperative itself, including the governmental ones. These too would be funded by the liquidity provided by sales.

Any income tax, goods and services tax, corporate profits tax or hidden subtraction VAT can be considered an element of price. Consumers pay the entire price. A GST simply brings that price forward. Income taxes, although funded by the customers (all those movie tickets Mnuchin got a piece of) would still be paid by the wealthier players in the game, if only because accounting for them as part of the Subtraction VAT so that the correct higher rate is paid would violate their privacy and not having a progressive income tax would give them too much of the pie, even more than their current undeserved share.

Dividend and capital gains taxes are lower than normal tax rates because tax is paid by the corporations they own, but only on profits, not wages. Shifting to VAT (both GST and Subtraction) would tax labor and capital at the same rate, allowing income taxes to do the same as a surtax that investors and executives could pay, except that doing so forces disclosure off too much information on their financial affairs. There is no bar for the CEO of Comcast/Univeral from owning Disney stock, but he certainly does not want his board and investors knowing that he might do so. I am sure the CFO, the talent and the CIO all feel the same way.

Tax reform should put in VATs, equalize all income tax rates, which only the rich would pay, and encourage employee-ownership, bot at home and abroad, by diverting some of the retirement taxes included in the Subtraction VAT toward purchasing employer voting stock. The new owners will give the same deal to their overseas brothers and sisters and the problem of how much the rich get (eventually nothing) and dealing with overseas capital will take care of themselves.

And to think, it used to be the Marxists who had no plan. The shoe is on the other foot.