Abolish The Corporate Income Tax and Tax The Rich

Atlantic columnist Megan McArdle makes the case for why abolishing the corporate income tax (and then taxing capital gains and dividends at the same rate as other income) is a proposal that both liberals and conservatives should be able to agree on:

The incidence of “corporate” taxes is not necessarily progressive. The “employer half” of the payroll tax, for example, is thought by most economists to fall pretty much entirely on the worker; corporations compensate for the extra cost by lowering the wages they offer. Taxes on corporate profits are exactly the same for middle class families who have some shares in a 401(k), and multi-millionaire heiresses.
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If we get rid of the corporate income tax, we could eliminate the special treatment for dividends and capital gains.

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Taxes, American Style

A while back Harvard economist Greg Mankiw caused a bit of a kerfufle when he noted that the amount of tax revenues raised by the United States per capita wasn’t much different than the amount raised in Europe. Tax rates in the United States are lower than in Europe, but per capita income is also higher in America, and the two facts seem to largely cancel each other out. Here, for example, are the per capita tax revenues for a handful of developed countries:

France .461 x 33,744 = 15,556
Germany .406 x 34,219 = 13,893
UK .390 x 35,165 = 13,714
US .282 x 46,443 = 13,097
Canada .334 x 38,290 = 12,789
Italy .426 x 29,290 = 12,478
Spain .373 x 29,527 = 11,014

Now granted, European countries tend to spend their tax revenues differently than we do in the U.S. For example, we spend more on defense, whereas they spend more on welfare. However, to some extent Europe’s apparently larger welfare state is an optical illusion. It looks bigger than it is, because the rest of the economy is so small.

Obama To Announce New Business Tax Cuts

President Obama will propose several new tax cuts and incentives for businesses on Wednesday, September 8th, including one which is billed as having a decidedly right-leaning flavor:

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama’s 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.

Why Morning’s Minion Should Favor Extending All of the Bush Tax Cuts

My former co-blogger Morning’s Minion recently attacked the idea of extending the so-called Bush tax cuts to individuals earning more than $250,000 a year:

It would cost $680 billion dollars over 10 year. This is far greater than the cost of extending unemployment benefits to those out of work, something the Republicans opposed vigorously (the unemployed do not fill their coffers). It gets worse. Nearly all of the benefit goes to the richest 1 percent, those making more than $500,000 a year. Even more than this, 55 percent of the benefit goes to a mere 120,000 people – the top one-tenth of 1 percent of all taxpayers. Doing the math, that comes to an average $3 million tax reduction to those lucky enough to sit at the helm of the income distribution. It is indeed the preferential option for the super rich. This would be troublesome at the best of times, but in the current economic climate when so many struggle to get by, it’s simply immoral.

I can see where Minion is coming from on this, but it seems to me that his position here (aside from being contrary to the views of most economists) is contrary to other things he’s written on the desirability of fiscal stimulus.

The Flypaper Theory of Taxation

Here’s a very interesting post by Stephen Gordon on what seems like a dull subject, namely tax incidence:

One of the more important things that distinguishes economists from non-economists is a familiarity with the notion of tax incidence. The statutory incidence of a tax (who sends the cheque to the Receiver-General?) is usually very different from its economic incidence (who is out of pocket?).

The basic intuition is simple enough. We all understand that if the government chooses to impose a tax on gasoline retailers of $0.50 per litre, customers can expect to see a similar increase in gas prices. Even if the statutory incidence falls on the sellers, the economic incidence is borne by the consumers.

The question of who ultimately bears the burden of the tax is almost entirely separate from the question of statutory incidence. (There’s even a pejorative term – the ‘flypaper theory’ – for the claim that taxes stick to those who are first touched by it.) So what does determine the economic incidence of a tax?

Why I Favor Cap and Trade

Lest anyone draw the wrong conclusion from my last post, I should add that I actually favor cap and trade, for the reasons laid out here by Tyler Cowen:

1. Even if we cut government spending a lot, some taxes will have to go up. This seems like the least bad tax to raise or create, since it has some chance of producing a better outcome. It’s hard to say that about most of the other potential tax boosts. I’d also cut the tax deduction for mortgage interest, of course. That too could improve the quality of outcomes.

3. A carbon tax might lead to a new green technology, with high upfront costs and low marginal costs. Some of the rest of the world might then adopt the technology, even if those countries don’t ever adopt a carbon tax. In the short run this seems a little pie-in-the-sky, but in the longer run is it so crazy? Haven’t the Chinese adopted most of our other technological innovations?

Caritas in Veritate 25, By the Numbers II

In yesterday’s post, we examined the claim, made by Pope Benedict in Caritas in Veritate 25, that globalization has led countries to deregulate their labor markets, which in turn has led to cuts in social spending. It turned out that the Pope’s first claim (that globalization led to deregulation) was consistent with the data, whereas his second claim (deregulation led to cuts in social spending) was not. Countries with freer labor markets tend, on average, to devote a greater percentage of GDP to social spending than do countries where labor markets are highly regulated (and, since countries with freer labor markets tend to be richer as well, the increase is even larger in absolute terms).

In addition to speaking of labor market deregulation, Caritas in Veritate also makes reference to countries adopting “favorable fiscal regimes” as a part of global competition, and suggests that this also has led to a decline in social spending. Evaluating these claims is a bit more difficult than evaluating the Pope’s claims about labor markets, because it is not entirely clear what the Pope has in mind when he speaks of “favorable fiscal regimes.”

One possibility is that the Pope is thinking here primarily about taxes, and that adopting a “favorable fiscal regime” consists in lowering taxes, particularly taxes on business, in order to attract foreign investment.