Thursday, February 7, 2013
The United States has included some form of income tax on corporations since the enactment of the Sixteenth Amendment one hundred years ago. Notwithstanding its long lineage, however, surprisingly little is known about who actually ends up bearing the cost of the tax, whether it be shareholders, workers, or customers. Perhaps in simpler economic times such as 1913, or 1932, or even 1980, this might have been acceptable. But the country finds itself in vastly different economic times than the ones it has faced in the past, requiring a new way to understand and implement the corporate tax. This Article will do so, taking into account, for the first time, the fact that macroeconomic conditions, such as high unemployment, can impact who bears the cost of the corporate tax. This insight into who actually bears the cost of the corporate tax can fundamentally alter the landscape of the corporate tax policy debate, whether it be using corporate taxes to increase progressivity or abolishing the corporate tax through integration. Only by explicitly incorporating the realities of the modern economy into fiscal policy in this manner can any real progress be made towards building a modern corporate income tax robust enough to survive the next one hundred years.
This Article will consider one specific example – the impact of the corporate tax on employment decisions – by proposing a Dynamic Self-Adjusting Tax, or DST for short, to replace the existing corporate income tax. The DST will take into account the fact that specific macroeconomic conditions, such as high unemployment, can create incentives for employers to shift the cost of the corporate tax onto labor. The DST offsets this by charging employers (through higher marginal tax rates) when they do so, while also rewarding employers (through lower marginal tax rates) when they make new investments in labor. In this manner, a proposal like the DST would permit policymakers to more closely tailor the real-world effects of the corporate tax with its intended policy goals.