TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, March 4, 2012

Johnston: Let's Cut Corporate Tax, Increase Capital Gains and Dividend Taxes

Reuters, Congress’ Potential Faulty Tax Logic, by David Cay Johnston:

If the corporate tax rate is cut, should the rates for dividends and long-term capital gains be increased? That issue was inadvertently put on the table by a leading free market organization, the American Enterprise Institute. The AEI, as part of its support for cutting the corporate tax, promoted the idea last month that workers, not investors, bear the burden of that tax. In taking that line, however, the AEI has undercut its own argument for tax relief for investors. Indeed, it shifts the debate toward higher taxes on capital gains and dividends and lower taxes on wages. ...

AEI economist Aparna Mathur makes this case in the current issue of the organization’s online magazine, in a piece headlined How Taxing the Rich Harms the Middle Class. “Workers bear a large portion of the burden” of the corporate income tax, Mathur told me. She suggested that half or more of the cost falls on workers, and perhaps all of it.

Her views, to which AEI drew my attention amid the debate on cutting the corporate tax, grow from research between 2006 and 2010 by Mathur and Kevin Hassett, AEI’s director of economic policy studies. In their latest paper they looked at official data on manufacturing wages from 65 countries. They concluded that higher corporate income tax rates depress wages. ...

On the face of it, the AEI argument suggests workers should be joining the calls for Congress to cut corporate income tax rates. But, if the argument is correct, then workers should also be calling for cuts in their own income taxes and an end to reduced rates on dividends and capital gains.

Here’s why. Investors often complain they are taxed twice on their profits: once through the corporate income tax and again through taxes on their dividends and capital gains.

But if the AEI’s argument is correct — that workers bear the burden of the corporate income tax – then investor complaints that they are taxed twice are false. Under the AEI argument, it is workers who are taxed twice: first through lower wages due to the corporate tax and then through levies on their wages, however low they may be.

Double taxation of investor returns was the logic used to justify the capital gains tax cuts in 1997 under President Bill Clinton and in 2003 under President George W. Bush, who also included dividends.

Without double taxation of corporate profits, that justification evaporates. Workers can now use AEI’s arguments to bolster their arguments for higher pay and lower taxes. I put this to Mathur of the AEI, who agreed that it is reasonable to conclude that double taxation is falling on workers. But, she said, lowering taxes on workers would not encourage investment.

Let’s debate this thoroughly before Congress changes the corporate income tax again, lest more relief go to those who do not deserve it at the expense of those who do.

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