Wednesday, February 29, 2012
Bloomberg, Should We Abolish the Corporate Income Tax?, by Peter Coy:
No. Bad idea.
OK, sorry, that was a little blunt. After all, there are a lot of smart people who think President Barack Obama didn’t go far enough in his recent proposal to cut the corporate income tax rate to 28 percent from 35 percent. They would like to see it go all the way to zero. They say trying to tax corporations is a waste of time because they aren’t like people—ultimately they just pass along the cost of the tax to their shareholders, workers, and (to a small extent) customers.
The abolitionists aren’t all conservatives, either. The Atlantic‘s Megan McArdle has said the corporate income tax “may be the stupidest tax we have.” Even a liberal like blogger Matt Yglesias asked on Feb. 24 why the U.S. doesn’t just ditch the corporate income tax. (He decided that getting rid of it now and replacing the revenue in a fair way is politically unrealistic.)
But this just might be a case in which the policy elites of both left and right are wrong—and ordinary Americans, who kind of like the corporate income tax, are right. The strongest argument for the corporate income tax is one that is rarely heard anymore but was widely used at its inception in 1909—namely, that the tax is a brake on excessive corporate power.
The person who has pressed this argument is Reuven Avi-Yonah, a professor at the University of Michigan Law School. Avi-Yonah is well-credentialed, with both a PhD in history from Harvard University and a JD from Harvard Law and consulting work for the U.S. Department of the Treasury and the Organization for Economic Co-operation and Development. His 2004 paper, Corporations, Society and the State: A Defense of the Corporate Tax, is a classic
The Atlantic, Why I Still Think We Should Eliminate the Corporate Income Tax, by Megan McCardle:
One of the first blog posts I ever wrote was on why we should eliminate the corporate income tax. This is not because I just looooooooove corporations, or wish to put more money into the hands of rich people--on the contrary, I want to pair an elimination of the tax with an end to the special low tax rates for dividends and capital gains, and maybe even an increase in rates for higher brackets if that's necessary to keep the thing revenue neutral. Which would actually be considerably more progressive than the current system.
Rather, I think the thing's horribly inefficient--companies and rich people spend an exorbitant amount of time arranging their affairs to be lower-taxed, rather than more productive. Taxing capital once, when it hits a person, as ordinary income, would in one fell swoop eliminate most of the tax-avoidance activity that goes on in this country. It's also not necessarily as progressive as its proponents think, and well, you can read all my other reasons for disliking it here.
Peter Coy, the economics editor of BusinessWeek, thinks I'm wrong. He argues that eliminating the corporate income tax isn't first-best policy, not even close. He channels Reuven Avi-Yonah, a law professor at Michigan, to argue that the corporate income tax is necessary to rein in the power of corporate managers. ...
It's an intriguing argument, but I'm not convinced. I feel like we have all sorts of vehicles for "supervisory control of corporations", and the IRS is probably not the most efficient. Moreover, it's far from clear to me that the taxing power has ever been very good at reining in the power of corporate executives. ... [T]the corporate income tax is largely expressive--we like policies which penalize corporations, particularly big ones, regardless of their actual effect on corporate power.