Abolition of the Corporate Income Tax
By David Henderson
Megan McArdle has a good post on her case for abolishing the corporate income tax. I say “good,” not “excellent,” because, in the midst of a comprehensive though succinct analysis, she doesn’t get the issue of incidence correctly. She starts out fine, pointing out that the legal incidence–who pays the tax–is different from the economic incidence–who ultimately bears the burden. But then she doesn’t pursue that and writes as if she thinks that shareholders bear the burden. We don’t know for sure who bears the burden but the larger the elasticity of the supply of capital to the United States, the lower is the percent of the burden borne by shareholders. See Harvey Rosen’s and Ted Gayer’s Public Finance text for a nice discussion of that. The entry in the Concise Encyclopedia is a nice discussion but doesn’t mention the international mobility of capital, which is a good bit higher than it was when many of the burden studies were done in the 1960s and 1970s.
Megan ends by saying, “I hope that liberals will at least consider that there might be a better way than the corporate income tax to achieve their goals.” Actually, some “liberals” [I, like Megan, use the term in the 20th century corrupted version that Americans use to mean “statists”] already have. Here’s a quote from a well-known liberal economist:
While corporations are legal entities that write checks to government, they do not pay taxes. They simply collect money from someone–their shareholders, their customers, or their employees–and transfer it to government. There is no such thing as taxing corporations as opposed to individuals. This immediately raises the issue of who ultimately pays the corporate income tax. The incidence of the corporate income tax is an area of economics with a large literature and little or no agreement. Depending upon the exact assumptions used, the definition of incidence, and the time periods under consideration, it could be a tax on shareholders, a sales tax on consumers, or a tax on employees. (Personally, I believe that it is a tax on shareholders in the short run and a sales tax in the long run, but my advocacy of its elimination does not hang on that belief.) While there may be a certain perverse political virtue in collecting a tax where no one is sure whether he pays it , simple economic efficiency and equity would seem to call for the elimination of taxes where incidence is uncertain. Only if we do so can we establish a tax system that is fair and has the economic consequences we intend.
Question: Who wrote this? Hint: he was an economic advisor to 1972 Democratic presidential candidate George McGovern.
Update: david got it. The answer is Lester Thurow. This is from his 1980 book, The Zero-Sum Society.