Monthly Archives: August 2011

On Corporate Taxation

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It is often assumed that those who defend corporations and the free market while opposing taxation are “coddling the super-rich,” and therefore, must be super-rich themselves.  This is false:  True free-marketeers are often not super-rich, as the free market produces both success and failure.  On occasion, those that succeed try to guarantee their future success in market, not by their own merit, but by their connections to government.  This system is no longer capitalism.  It is crony capitalism, or corporatism, or lemon socialism.

Before the peasants decide to destroy the engine of the economy, let’s set some things straight.  The American economy became the world leader through free market principles, but there is a clear distinction between the free market and what the American economy is now.  Let’s go after the source of our malaise: our 65,000-page tax code.  Generally speaking, and sans sweetheart deals, corporations pay a 35% tax on their profits; corporate taxes, however, comprise only 15% of federal tax revenues.  This disparity shows the absolute inefficacy of the corporate tax.

I support full-scale repeal of the corporate tax.  I know I’m mostly alone on that.  Abolishing the corporate tax would provide the proverbial “shot in the arm” this country needs.  To accomplish this, I believe the burden should eventually be shifted to a flat sales tax; on that point I know I’m not alone.  In the meantime, I believe America is ready for an overhaul of our tax system; I also believe, on this point, both Left and Right can find points to philosophically coalesce.  First, let’s establish some maxims.

Corporations ARE People

Last week on the campaign trail, Mitt Romney got himself into a bit of trouble by proclaiming, “Corporations are people.”  Text of the encounter is below, with video here:

ROMNEY: We have to make sure that the promises we make — and Social Security, Medicaid, and Medicare — are promises we can keep. And there are various ways of doing that. One is, we could raise taxes on people.

AUDIENCE MEMBER: Corporations!

ROMNEY: Corporations are people, my friend. We can raise taxes on—

AUDIENCE MEMBER: No, they’re not!

ROMNEY: Of course they are. Everything corporations earn also goes to people.

AUDIENCE: [LAUGHTER]

ROMNEY: Where do you think it goes?

AUDIENCE MEMBER: It goes into their pockets!

ROMNEY: Whose pockets? Whose pockets? People’s pockets! Human beings, my friend. So number one, you can raise taxes. That’s not the approach that I would take.

I’m no Romney fan, for various and unrelated reasons.  On this issue, however, Romney is spot-on.  According to the 1819 Supreme Court case Dartmouth College vs. Woodward, and upheld in the 1886 case Santa Clara County v. Southern Pacific Railroad, corporations have the same rights as people and are protected equally by the Fourteenth Amendment.  There should be no other way here; otherwise, the government could run over the rights of corporations by fiat, letting some businesses fall while supporting some arbitrarily, nationalizing them as they see fit.  Oh, wait.

Essentially, Romney channeled the economist Milton Friedman, who famously asked:   ”Can you tax business?  What’s business?  There’s no business to be taxed.  There are people; only people can pay taxes… So when you talk about a tax on business, it has to be paid by somebody.  Either it’s paid by the stockholder, or it’s paid by the customer, or it’s paid by the worker.”  Due to this “hand-me-down” economic effect, it has been found that “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”

Efforts to squash both corporate free speech (1st Amt.) and equal protection under the law (14th Amt.) have ramped up in recent years, culminating famously with the Citizens United case, in which freedom won.  Class warfare of this kind is typical in a recessionary period, but let’s be equal in our judgement:  If corporations aren’t people, then neither are unions.  Furthermore, it is counterintuitive for pro-labor protestors rally in favor of corporate taxes, when corporate taxes punish labor the most; economists Kevin Hassett and Aparna Mathur compute, “A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.”

Just as corporations have the same rights as people, corporations are subject to the same laws as people.  They should be treated freely and equally; their rights should be respected, but when they break the law, they should be punished.  On this, both Left and Right can agree.  It is important to remember that, under a free society, the outcomes are not going to be equal, or freedom does not exist.  Channeling Benjamin Franklin, Milton Friedman once said, “The society that puts equality before freedom will have neither.  The society that puts freedom before equality will have a great measure of both.”

A Free Economy Benefits Us All

This is painfully obvious to anyone who has observed the history of nations.  A consequentialist view of the economic systems of the world’s most successful nations will find they were rooted in freedom.  All socialist nations eventually end at the same place.  Few American politicians would call themselves socialists, although many policies they support are exactly that.

A transaction-based view also proves the virtue of the free market:  The free market is not a zero-sum game.  People exchange money for goods and services freely, both believing they got the better deal at the end of the day.  As much as I hate paying $4 for a gallon of milk, I’d be hard-pressed to find a cow, milk it, pasteurize the milk, and bottle it for less than $4.  Nobody forced me to buy the milk, and nobody forced the farmer to sell it.  Transactions taking place within the free market benefit us all.  Interventions in the free market, however, do not.

Common Ground

Which brings us back to corporate taxation.  It may seem there is no common ground to be reached between the Left, who forever want to raise taxes, and the Right, who never do.  I even wrote about the importance of not compromising over tax increases, particularly during an economic recession, in my last post.  Let me highlight some points the Right could concede over to lower or abolish the corporate tax:

1.  Close loopholes and end subsidies. This is not for revenues, but for principle.  Equal protection under the law means equal treatment under the law.  We have no kings, neither in government nor in corporate management.  Corporate favoritism swings Left and Right depending on who’s in charge.  That’s how Obama’s Czar-CEO buddy Jeff Immelt’s GE paid $0 in taxes in 2010; he helped write the 2009 Stimulus Bill.  Both Left and Right ignore corruption when their issues are at stake; to be consistent, the Right must simultaneously stand up against subsidizing the oil industry and green energy initiatives.  These benefits create distortions and false incentives for shell firms that contribute little to the actual economy.

2.  Normalize the income tax rates. Again, this is not for revenues, but for principle.  Raising taxes is unnecessary:  According to IRS figures, a 45% rate on incomes of more than $1 million would generate $31 billion, while an even more progressive tax, with rates of 50%, 60%, 70% on incomes of $500,000, $5 million, $10 million respectively would generate an added $133 billion.  That is roughly 10% of  the current annual budget deficit.  A higher income tax will not solve our budgetary problems.

Furthermore, taxing productivity, and punishing investments in American business, will not get our economy moving again nor bring jobs back to America.  The income tax, to be discussed in my next post, must be addressed.  The income tax is separate from the corporate tax, capital gains tax, tax on charitable donations, and the carried interest tax.  These additional taxes are in fact “double taxation,” as income has already been taxed once; therefore, these earnings (and donations) should not be taxed at or above the same rate as income, if at all.  A net-zero income tax, without loopholes and benefits, would provide a predictable – and equitable – playing field for all wage-earners.

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Filed under Ideology, News
Aug 19, 2011

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