Corporate vs Personal Income Taxes

Tuesday, June 03, 2008 | 03:30 PM

The Sunday NYTimes has an interesting commentary from Harvard prof Greg Mankiw on Corporate taxes:

Compared with other ways of funding the government, 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.

Of course, a corporate tax cut would affect the federal budget. And any change in tax policy has to be made against a background of a looming fiscal crisis, which threatens to unfold as baby boomers retire and start collecting Social Security and Medicare. 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.

Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts. To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.

Mankiw suggests dropping the corporate tax rate, and making up the revenue short fall with a Pigou tax of 40 cents a gallon on gasoline. That has precisely zero chance of passing.

To give it some context, consider this excellent chart assembled by Time's Justin Fox:



Justin adds some caveats:

-Corporate income is taxed twice -- once as corporate income and once as either capital gains or dividend income (which are both counted under personal taxes)

-Economists teach that corporations are often able to pass on much of their tax burden to employees and/or customers.

-Relatively high corporate tax rates incentivize corporations to find ways to run their profits through lower-tax jurisdictions

-Corporations are just legal constructs owned and operated by people who, for the most part, pay taxes.


A chart for the corporation-bashers among you
Justin Fox
Time, May 21, 2008 9:09

The Problem With the Corporate Tax
NYT, June 1, 2008

Tuesday, June 03, 2008 | 03:30 PM | Permalink | Comments (41) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Are you sure this article wasn't written by the WSJ editorial page?
The way the dividend tax break should have been structured is to allow corporations to deduct dividends, while taxes on those dividends paid by the shareholder at their individual tax rates. That encourages dividend payouts while properly taxing those who receive them.

Posted by: SteveC | Jun 3, 2008 3:47:52 PM

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