Corporate taxes

February 1, 2012

When the topic is economics I tend to keep my mouth shut; I know that I don’t know. But there is one question that has, from time to time, been a bother to me: why do corporations pay taxes?

I can understand citizens paying taxes: there are certain goods — defence, transportation infrastructure, garbage collection — that we all benefit from, and we contribute money with which those goods can be acquired. It seems to me that the fairest sort of tax is a flat tax — the same number of dollars from each citizen goes into the pot — although few people advocate that, and maybe for good reasons that I haven’t thought of.

But it is odd to me that individuals, who are already paying taxes, should pay more taxes — that is, corporate taxes — just because they have decided to work together on something. What is the rationale for that (apart from a simple cash grab by the government)?

Anyway, I air these half-baked thoughts today because I came upon an article, at Public Discourse, which advocates abolishing corporate income taxes. The author, Thomas Haine, gives a few reasons why doing so might cause problems — reasons I, naturally, had not thought about — but concludes that they are not insurmountable. Indeed, he thinks abolishing such taxes would be a bi-partisan winner, at least at a grassroots level. (Politicians, I understand, are rarely in favour of tax reductions.)

It is all very interesting, in a perplexing and foggy kind of way, and I wish I had a clue as to whether it made any sense.

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7 Responses to “Corporate taxes”

  1. Mac Says:

    Did you really mean same amount from each, not same percentage? Usually when people talk about a flat tax they mean the latter, which I think would be very fair. Unfortunately it seems, according to people who’ve worked up the numbers, that in order to fund our huge modern governments, the income tax would have to be quite high, over 20% I think in the U.S., and that’s without removing other taxes.

    I don’t really have an opinion on corporate taxes, though it does seem that as long as you were taxing the individuals who profited you could in theory get the same revenue. Seems like corporate taxes might actually provide opportunities for hiding money from the tax collector. But then I don’t know anything about this, either.

    • cburrell Says:

      Well, in my naivete I really did mean that taxing the same number of dollars seems fairest, rather than the same percentage of income. To me, taxes are just a way to collect money that can be used for the public good. A rich person probably derives about as much benefit from good roads (for example) as I do, so why should they pay more for their maintenance? Maybe a rich person benefits more from good police services than I do — because they have more things to be protected from theft — so perhaps it does sometimes make sense for them to kick in more than your average joe. From that point of view, I can sort of see the sense of a flat percentage of income being taxed. I certainly can’t see the sense of tax codes that tax rich folk at higher percentages; I figure governments do it because the percentage of the population that is rich is (by definition) fairly small, and so in democratic systems they can be taxed at high (and, in my judgment, unjust) rates without losing too many votes.

  2. Jim Says:

    It’s been a long time since econ 101, but taxes aren’t actually on people (according to economists). They’re on the three categories of economic input: land (natural resources), labour, and capital. Corporate taxes are taxes on the latter, primarily, and, to the extent that individuals earn returns on capital, most systems treat that income differently than wages. Most economists argue that taxes on capital should be lower than taxes on the other two inputs because 1) capital is more mobile than land or labour and is likely to go somewhere else 2) in our modern economy, so much of our productivity comes from heavy investments of capital — we want to encourage productivity and so should not discourage its accumulation. Interestingly, even fairly socialist countries like Sweden in the 1960s and 1970s observed this differentiation — they taxed returns on capital and corporate income at much lower rates than personal income. Canada and the US tax returns on capital at much lower rates than wages.

    This seems to be an efficient situation, but I’m not sure how to evaulate it morally — expressing a preferential option for the poor would seem to suggest taxing capital heavily and labour relatively lightly, all else being equal.

  3. Jim Says:

    I’m also a fan of the flat tax, but of the form that sets a fairly high minimum for when you start paying taxes on income (the poverty line, usually), takes a constant percentage of income after that, and treats all personal income sources the same. This seems to me to include both what most people on the left want from taxes (the poor not paying them and those that earn more paying proportionately more) and those on the right (a simple tax system that doesn’t create incentives for people to act in ways other than what the market suggests). The political problem with implementing it is that politicans of all stripes have found creating loopholes in the tax system a very efficient way to curry favour with specific groups–those whose kids take music lessons or play organized sports, to take two recent examples.

  4. cburrell Says:

    That’s interesting, Jim. I didn’t know about the theory of taxing labour, capital, and property. I suppose governments tax wealth, and wealth does not necessarily come from working a job; it could just as well come from owning property or things. I’ll have to think about it. It still doesn’t clarify for me why corporations get taxed, though, on top of the taxes on the people who are incorporated. Unless it is simply because, in our legal system, corporations can own property, etc. Maybe it makes sense.

    Your sketch for a simpler tax code sounds good to me. I really hate the idea of progressive taxation, though I can certainly see the sense of tax exemptions for the poor. I suppose a crafty tax man could catch me in a contradiction: he could argue that the ‘flat tax’ rate is really 80% (or whatever) for everyone, but those in the middle class and below get exemptions to pay lower rates. The result only looks like progressive taxation. But that would just be mean.

  5. jhbowden Says:

    We know that those with lower incomes, compared to higher incomes, usually devote a larger percentage of their earnings to spending rather than investment. This implies that in terms of “fairness,” corporate taxes are regressive, since they are ultimately paid by the consumer through the price of goods and services. The higher prices per unit caused by the tax, ceteris paribus, encourage capital flight to more competitive environments, which isn’t good for workers, since, as Jim mentioned above, labor is not as mobile as capital.

    • cburrell Says:

      Yes, that makes some sense to me. The argument that is always raised in Canada when someone (usually our left-wing New Democratic Party) proposes raising corporate taxes is that doing so would encourage companies to pack up and move to greener pastures. So I am familiar with that line of thought. But I hadn’t before considered the first point you make. Thanks.


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