Seeker Blog

Indeed, if we increased the tax on gasoline to the level that many experts consider optimal, we could raise enough revenue to eliminate the corporate income tax. And the price at the pump would still be far lower in the United States than in much of Europe.

Don’t laugh. I’m serious.

… In 2007, corporate taxes brought in $370 billion, representing 14 percent of federal revenue. Cutting the rate to 25 percent would seem to cost the Treasury about $100 billion a year.

…and the net budgetary cost of 35 to 25% cut is likely to be closer to $50 billion a year — due to incentives, productivity growth, increased personal incomes –> increased personal taxes and other efficiency improvements. A recent AEI study concluded that such corporate tax cuts could be self-funding through their benefits.

That would be some dramatic, highly effective tax reform! Almost all taxes distort incentives — the corporate tax is one of the most distortionary and costing the US economy a lot of productivity growth. That’s why cutting the corporate tax is more effective than cutting personal income taxes [in terms of gross tax collections, not rates].

In his op-ed Greg Mankiw explains that 40 cents/gallon tax increase would fund John McCain’s proposed cut in the corporate tax from 35 to 25 percent.

Aside - would it be smart politics for McCain to withdraw the silly gas-tax holiday, explaining he now understands that is accomplishes nothing other than some redistribution of tax money from low-driving to high-driving families? If he got rid of that plank, then his economics proposals would all be on the side of the angels.

Back to Prof. Mankiw’s op-ed, I liked his introduction re: McCain’s corporate rate cut:

…It is perhaps the best simple recipe for promoting long-run growth in American living standards.

An even better and simpler idea is the one Greg raises later on — zero corporate tax. I highly recommend this short essay, as it makes clear several important economic principles. Here’s a couple of excerpts:

…A corporation is not really a taxpayer at all. It is more like a tax collector.

The ultimate payers of the corporate tax are those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax. The corporate tax leads to lower returns on capital, lower wages or higher prices — and, most likely, a combination of all three.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax.

In a 2006 study, the economist William C. Randolph of the Congressional Budget Office estimated who wins and who loses from this tax. He concluded that “domestic labor bears slightly more than 70 percent of the burden.”

Mr. Randolph’s analysis stresses the role of international capital mobility. With savings sloshing around the world in search of the highest returns, he says, “the domestic owners of capital can escape most of the corporate income tax burden when capital is reallocated abroad in response to the tax.” When capital leaves a country, the workers left behind suffer. (According to Mr. Randolph, however, some workers do benefit from the American corporate tax: those abroad who earn higher wages from the inflow of capital.)

A similar result was found in a recent Oxford University study by Wiji Arulampalam, Michael P. Devereux and Giorgia Maffini. After examining data on more than 50,000 companies in nine European countries, they concluded that “a substantial part of the corporation income tax is passed on to the labor force in the form of lower wages,” adding that “in the long-run a $1 increase in the tax bill tends to reduce real wages at the median by 92 cents.”

…the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the “distortions that the corporate income tax induces are large compared with the revenues that the tax generates.” Reducing these distortions would lead to better-paying jobs.