Wednesday, October 2, 2013
Adam H. Rosenzweig (Washington U.), A Corporate Tax for the Next One Hundred Years: Incorporating Macro-Economic Conditions and Fiscal Policy into the Corporate Income Tax, 108 Nw. U. L. Rev. ___ (2014):
The United States has included some form of income tax on corporations at least since the enactment of the Sixteenth Amendment one hundred years ago. Notwithstanding this long lineage, however, surprisingly little is known about who ultimately ends up bearing the cost of the tax, or whether it even matters. Perhaps in simpler economic times such as 1913, or 1932, or even 1980, this might have been acceptable. But as the world confronts vastly different economic conditions than the ones faced in the past, finding new ways to understand and implement the corporate tax will become crucial to its survival. This Article will introduce one way to do so by taking into account how macro-economic conditions, such as high unemployment, can impact who bears the incidence of the corporate income tax. The lesson that can be learned is that conditions such as high unemployment can cause the incidence of the corporate income tax to shift from capital onto labor, at least as compared to periods of full employment. This insight into who actually bears the cost of the corporate tax can fundamentally alter the landscape of the corporate tax policy debate, from using corporate taxes to increase progressivity to abolishing the corporate tax through integration. By explicitly incorporating both macro and micro-economic realities into fiscal policy, policymakers can transform the corporate income tax from a blunt and uncertain fiscal tool to a more precise instrument robust enough to survive the next one hundred years.
This Article will consider one specific example, proposing a Dynamic Self-Adjusting Tax rate, or DST for short. The DST takes the incentive of employers to shift the cost of the corporate tax onto labor through lower wages, increased layoffs, or otherwise during periods of high unemployment as a given. The DST then offsets this by charging employers (through higher marginal tax rates) when they do shift the cost of the corporate tax onto labor while, at the same time, rewarding employers (through lower marginal tax rates) when they make new investments in labor. In this manner, the DST could help reduce existing tax-induced distortions while also potentially generating positive macro-economic feedback effects. By incorporating both macro and micro effects into the analysis, the DST could prove pro-growth, pro-employment, and self-financing all at the same time.