January 23, 2007
From the desk of Jane Galt:Kevin Drum asks:
And as long as we're thinking big, I'll toss out one of my favorite outlandish suggestions: why not abolish the corporate income tax as part of this grand bargain? After all, it doesn't raise all that much money any more (less than 2% of GDP); it's by far the biggest source of tax complexity we have; it mostly gets passed on to consumers anyway; and it's the foundation of all corporate welfare. Take away the corporate income tax, and presto! No more tax breaks for special interests. K Street would be decimated.Consider this deal: The corporate income tax goes away. It's replaced by a VAT plus an increase in capital gains and dividend taxes to the same level as the tax on income. (Added bonus: the whole "double taxation" argument goes away since corporate profits aren't taxed in the first place.) And the whole thing is used to fund national healthcare (along with the payroll taxes and general fund revenues that are already dedicated to healthcare). States could be encouraged to follow suit by agreeing to pick up the Medicaid costs of any state that kills its own corporate income tax. . . .
Since no one else that I know of has ever proposed a deal like this, I assume it's a dumb idea. But I'd be curious to learn why it's a dumb idea. If the corporate income tax were responsible for a significant part of the federal budget, I could see why we'd need to keep it. But in fact it's responsible for no more than a tenth of all federal receipts. So why not kill it and replace it with something better?
Kevin, I thought we were friends. I proposed something like this years ago. Not a VAT, of course; it's regressive, not transparent, and has significant compliance costs. But the elimination of the corporate income tax and the taxation of captial gains and dividends at par with wages, which is the main thrust of the thing.
Posted by Jane Galt at January 23, 2007 12:38 PM | TrackBack | Technorati inbound links"); ?>1) Skip the national health insurance or change it to a subsidy for individuals buying a plan
2) change the VAT to a dividend/cap gains tax as recommended by Jane_Galt (what the heck is the purpose of eliminating the corporate income tax when the corporations have to fill out VAT forms instead?)
3) allow deferral of all taxes on dividends and capital gains until withdrawl from the investment account (preferably: no taxes until you've withdrawn more than you've put in, and then tax at the normal rate)
And then I'd call it an improvement.
Posted by: Person on January 23, 2007 1:17 PMThe corporate income tax goes away. It's replaced by a VAT plus an increase in capital gains and dividend taxes to the same level as the tax on income. (Added bonus: the whole "double taxation" argument goes away since corporate profits aren't taxed in the first place.) And the whole thing is used to fund national healthcare (along with the payroll taxes and general fund revenues that are already dedicated to healthcare). States could be encouraged to follow suit by agreeing to pick up the Medicaid costs of any state that kills its own corporate income tax. . . .
Well let’s see, conservatives and libertarians get:
The elimination of the corporate income tax
The cost for this is tax simplification:
Raising the tax on capital gains and dividends to the same level of the income tax
A VAT tax of unknown rate
A new federal health care entitlement (which presumably will role Medicare, Medicaid, CHIPS, and all of the other federal health care programs into it)
Why is this a bad idea? Because the aggregate effect is increasing the taxes on investment (I haven't crunched the numbers but I suspect that raising the rates for the tax on dividends and capital gains to the same level as income tax rates will probably be more expensive than the corporate income tax) plus a new hidden tax on investment. Add to that the creation of yet another entitlement program (one that will almost certainly grow out of control just as Medicare and Medicaid have done) and there is little for conservatives or libertarians to like with this proposal.
Does it annoy anyone else when people use 'percentage of GDP' as a statistic? It always seems to be used to say "see, this isn't that big".
It seems to me people always deploy it when it's smaller than 5% or so. You never see someone advocating %GDP when their pet program will cost 15% of GDP or some such number. I admit its usefulness as a comparison, but quite often, it's just a means of getting a really big denominator. (I think Drum could have just as easily used % of the federal income.)
Posted by: Klug on January 23, 2007 1:21 PMKlug: I've noticed that too. It also lets them get away with slipping in a "it'll just require 1% more" line, or something to that effect. That is, they increase its cost from 3% to 4% of GDP, and get you to think of it as a 1% increase.
Another tactic I've seen (a bit off topic) is for people to describe something they know you'll hate as "non-violent". i.e., "Look at how these Greenpeace members who shut down a stock exchange did it NON-VIOLENTLY" or "What's the big deal about pickpocketing foreign travelers? It's a non-violent crime!"
Posted by: Person on January 23, 2007 1:26 PMThorley Winston hits it. Trading off tax simplification for a new entitlement is a terrible deal. I'd also guess that taxes would go up with the entitlement and capital investments would flow offshore.
Posted by: hederman on January 23, 2007 1:58 PMRather than overhauls which become omnibus giveaways I believe tax changes should be taken in small steps. For the double-tax of dividends argument I propose:
Income paid as dividends should not be taxed as a corporate profit. Retained earnings should be.
Those receiving dividend payouts would be continue being taxed.
Corporations would withold 15% of the dividend and send it to the IRS. Later, when tax returns are filed, the individual can claim a credit up to the amount withheld but no refund.
Dividends paid into IRAs could be claimed for refund on tax returns. The refund could put back into an IRA or spent. 401Ks, being employer related, would not have the same exception.
No group - profit, non-profit, foreign or domestic - would be exempt from 15% initial withholding.
Mutual funds, etc. already report dividends passed through. But new reporting systems and procedures would be needed at the corporation and IRS.
Posted by: K on January 23, 2007 2:03 PMYou could get the same good results with my favorite wonky tax reform.
Tax GAAP income not distributed at the highest individual rate. Dividends count as income to individuals (they're annual and easy to track), capital gains don't (they are long-term and hard to track.)
This has the additional advantage of making tax-preferred savings worthwhile again.
Posted by: SamChevre on January 23, 2007 2:22 PMNot a VAT, of course; it's regressive, not transparent, and has significant compliance costs.
I don't follow you, Jane. I can see why a VAT is regressive. But how is it not transparent? "That'll be $3.00 for the hamburger plus $0.75 VAT." Although if you try to make it less regressive (by having variable rates, exemptions, etc) then it gets less transparent.
And are compliance costs more 'significant' than the costs of corporate income tax? If a VAT truly replaces another tax, compliance could be cheaper overall.
Posted by: rcriii on January 23, 2007 2:36 PMI don't follow you, Jane. I can see why a VAT is regressive. But how is it not transparent? "That'll be $3.00 for the hamburger plus $0.75 VAT."
That’s a good example of a retail sales tax. A VAT (value added tax) is taxed at every level where value is added to the end product (e.g. the baker who made the bun, the company which made the catsup, the butcher who made the hamburger, etc.) in which case the final consumer isn’t going to see each tax that was added along the way because they will be “added” the price.
Under VAT, don't all the little pieces added along the way simply add up to VAT% paid by the end user? Each middleman gets to take a credit for what he paid his suppliers off the VAT remittances he gets from his customers.
Posted by: Creech on January 23, 2007 4:59 PM"it mostly gets passed on to consumers anyway"
I didn't need to read any further after that comment. For those who haven't had a lot of experience setting prices in a free market, please remember that you live in a modern post-industrial society where competition is slowly but surely eliminating the low hanging fruit. Those who think us corporate types pick and choose our gross margins need some real world experience.
Since at least about the 70's when volume could cover even the most inefficent capitalists, consumers have had the upper hand. If you need proof, read the earnings digests in the Wall Street Journal to see if all corporations are profitable.
Posted by: Gary Owen on January 23, 2007 5:18 PMCapital gains should be taxed like regualar income, but on a different track. So that you pay no tax on the first 20k of capital gains, with a progressive rate after that. The idea is that those only earning income from capital should pay at the same rate as those earning only income from labor. With the caveat that those struggling to save are encouraged by low or no capital gains. Forget 401ks and corporate income taxes this is the way to go.
Posted by: matt on January 23, 2007 5:25 PM> But in fact [the corporate income tax is] responsible for no more than a tenth of all federal receipts. So why not kill it and replace it with something better?
Can we use the "it's only a small part of receipts" argument against the estate tax as well?
Matt,
My objection to capital gains isn't fairness, or effectiveness--it's complexity of implementation. You need to have good, dated records of how much you paid for things, when--which is hard when you (e.g.) reinvest dividends.
That's why I prefer to tax retained earnings, rather than capital gains--not it's theoretical betterness, but it's much much greater ease of compliance.
Posted by: SamChevre on January 23, 2007 5:35 PMmatt,
Of course the problem arises if there is an positive externality to capital formation. If there is, then taxing it at the same rate as labor might lead to a suboptimal mix of capital and labor.
Posted by: Bill Dalasio on January 23, 2007 8:41 PMReally stupid idea. Earnings would accumulate tax free in corporations making the rich richer than ever.
In theory they cant spend these earnings without taxation, in practice they will draw on them in perks. Regardless the market power of the rich and corporations would grow.
In addition most businesses are not incorporated, they would be at a significant disadvantage and would be forced to incorporate. Adding unneccesary complexity to their operations.
Posted by: Young man on January 23, 2007 10:38 PMSam, people earning more than 20k a year in capital gains have computer programs that do it for them. I don't take that objection all too seriously.
Bill, I agree that this is a problem, however, my sense is that sometimes fairness is more important than efficiency, this is one of those times. Secondly, this plan could encourage savings among those who need to save most. I think in this instance we could probably produce a model that would tell us whether and how much growth we might lose. That would have to be a big number to convince me otherwise.
Posted by: matt on January 23, 2007 10:48 PMEliminate the corporate tax..
Institute a VAT..
Raise dividend and cap. gains taxes..
Create a new entitlement..
Reasons why its a bad idea?
One word.....Europe
Nuff said.
Posted by: Jeff on January 23, 2007 10:49 PMIf we just implemented land value taxation, we wouldn't have to worry about whether the corporate income tax or a VAT was more complicated, or about advantages to incorporated vs. non-incorporated businesses. Corporations would just pay for the resources they used, as would individuals. Paying your tax bill ("Your lot is x square feet, in an area of town where land is worth y cents per square foot, so pay xy") would not normally require the services of a CPA; production and earnings would be taxed less, or not at all; and no one would roll up his acreage, and carry it to a jurisdiction with lower taxes.
Posted by: Nicholas D. Rosen on January 24, 2007 12:02 AMMr. Rosen--
I think we can get some of the left on board with the LVT if we start calling landlords "rentiers," and we can somehow show that the LVT encourages people to live in cities, which are far greener than suburbs and exurbs.
In fact, I think all the LVT needs is one or two good salesmen, and I expect it to enter the national debate in the next 20 years.
Posted by: Bob Dobalina on January 24, 2007 12:23 AMWhy not a straight out consumption tax? the government already knows what your income is unless you're a plumber who takes only cash, but large incomes are very hard to hide, and it's pretty hard to hide your assets unless you bury cash in a hole in the ground, in which case you'd have to worry about worms instead of the IRS taking away your money. So the IRS looks at your income over the year and deducts the change in your assets (adds the change if it is negative) and taxes the remainder. Every taxpayer could be given an exemption based on some reasonable living expenses, and the rate on the remainder could be as progressive as whatever liberals desire. Some liberals might worry that this encouragement of savings would lead to the build up of enormous estates; but wealth ain't worth anything until you spend it. If you spend it, it will be taxed.
LVT is a good idea but a non-starter. In places like Maine liberal politicians are suckers for sob stories from people who happen to own a chunk of coast line and weep and moan because they have to pay more in property taxes than someone who lives on a half acre miles from the coast. The latest gimmick is lower taxes for coastal property used in commercial fishing. To acheive this happy result, Mainers voted overwhelmingly to amend their constitution with not a peep from the environmentalists about it. Soon you'll see NY billionaires hauling in some smelt off their mile-long docks and flogging a few at the local farmers' market so their land can be assessed at a dollar an acre.
Posted by: greenjay on January 24, 2007 7:39 AMTake a look at the net worth of our political overlords and tell me any of this has the proverbial snowball's chance.
You're going to pay, and probably more, for the politicians to "solve" your problems. Will you get your money's worth? Well, let me put it this way, how many government programs would you voluntarily pay for? Social Security? Medicare? Welfare for Corporate Farms?
My answer would pretty much end with national defense and roads. I'll keep the third of my pay the governments take and buy what I need, thank you.
Posted by: MarkD on January 24, 2007 8:09 AMUnder VAT, don't all the little pieces added along the way simply add up to VAT% paid by the end user?That's how it works - and if I understand it correctly, one result is that, unlike sales taxes, the tax is invisible to the final purchaser. Take a pair of cotton socks as an example. The farmer would pay a tax on what he got for the cotton. The manufacturer would get to deduct the cost of the cotton from the total sales, and pay a tax on that. The distributor and store would each pay tax on their sales price - their cost for the product. There's no overall total readily available. That may be one reason it's possible for Euro govs to take a larger percentage of the total than it is in the USA. Posted by: markm on January 24, 2007 9:09 AM
Capital gains should be taxed like regualar income, but on a different track. So that you pay no tax on the first 20k of capital gains, with a progressive rate after that.
Sound like a sensible suggestion -- in part. But why not make the first 20K in "regular" income also non-taxable?
Posted by: Jasper on January 24, 2007 9:20 AMSince others are already posting their Federal Tax Schema of choice I'll chime in.
*Abolish the corporate income tax.
*Treat all forms of remuneration (employer-paid insurance, retirement benefits, company car/house, etc) as taxable income.
*Institute a flat tax rate of 15%.
*Institute a single standard deduction of $100K, to be adjusted for inflation annually.
*Buy out all current Social Security recipients with $500K checks.
*Buy out soon-to-be SS recipients with payoffs of sequentially decreasing amounts ($450K if you're eligible for SS next year, $400K if you've got two years to go, $350K if three years, and so on...this may need tweaking as it'll be expensive).
*Eliminate Social Security contributions and direct all employers to distribute their matching contributions to their employees instead (de facto, across-the-board raise for the middle and lower classes without hurting the corporate bottom line).
I'm still trying to figure out how to eliminate Medicare/caid, but this is a start.
Jason B.
Posted by: Jason Bontrager on January 24, 2007 9:24 AMThat's how it works - and if I understand it correctly, one result is that, unlike sales taxes, the tax is invisible to the final purchaser.
The Canadians have a VAT that is most definitely not invisible to the consumer, because it's added at the register. In the Maritimes (and I think Quebec, too, IIRC) the federal VAT is consolidated with the provincial one, and they hit you up with 14 or 15 points (or is it 17 or 18?) on your purchase. This system seems reasonably transparent to me.
Posted by: Jasper on January 24, 2007 9:25 AMThe corporate income tax is an abomination. Kevin at least has that part right. I wouldn't be surprised if the deadweight costs of the tax far exceed the actual revenue collected.
Posted by: jult52 on January 24, 2007 9:38 AMI'd go for that if we'd also be allowed to once again deduct all interest. It's seems quite unfair to me that if I earn interest, I have to call it income, but I'm not allowed to deduct interest that I pay.
Posted by: Rand Simberg on January 24, 2007 10:00 AMSam, people earning more than 20k a year in capital gains have computer programs that do it for them. I don't take that objection all too seriously.
Matt, that's exactly my point. if you make 20k a year in capital gains, you can afford to comply with anything. If you make $200 every other year, it's a lot more difficult. It is even worse if, in an effort to be fair, you index costs (so that keeping up with inflation isn't taxed.)
Remember, too, that MOST capital gains are just retained earnings; in my plan, retained earnings would be taxed at fairly high rates.
Posted by: SamChevre on January 24, 2007 2:01 PMJane or other knowledgeable soul,
RE: Capital gains taxes
I was under the impression that Chamley and Judd's work on optimal capital taxation was still valid. According to them, the optimal tax on capital is zero or pretty close. Given their reasoning, raising the capital gains taxes strikes me as wrong. Even if the trade-off is eliminating Corp income taxes.
Increasing the tax on risk-taking seems ill advised.
Posted by: Q on January 24, 2007 4:06 PMNote that Congress and both major political parties have a major incentive to keep the corporate income tax around. It gives them a major handle on corporations and a way to reward those who most successfully bribe - I mean, er, lobby - their representatives. No taxes = fewer bribes.
Obviously for those of us not in on the graft this is a major plus, but there's the little matter of enacting it.
Posted by: Shelby on January 24, 2007 7:58 PMJasper: If that's how the Canadian VAT works, they're unreasonably complicating what started out as a pretty simple system. Of course, that's pretty typical of what politicians do, as anyone who's looked at the USA's tax code knows... Also note that the Canadian government has to be imposing a lot of other taxes that aren't as visible, since 18% isn't even half of the proportion of the economy that the government spends.
What I'd prefer was to eliminate income tax and nearly all other federal taxes, replacing them with a sales tax. To replace all the other federal taxes would require about a 30% markup at the cash register. (State taxes would be on top of that, or else collected through other means.) I'd suspect that being reminded every time you spent any money of how big a bite the feds were taking would make taking your money and spending it to buy your vote a far less successful re-election strategy, so I never thought there was any possibility Congress would go for something so much against their own interests - but if Canada's parliament could have been stupid enough to make the VAT maximally visible, maybe there's hope for us...
Posted by: markm on January 25, 2007 10:18 AM"Note that Congress and both major political parties have a major incentive to keep the corporate income tax around. It gives them a major handle on corporations and a way to reward those who most successfully bribe - I mean, er, lobby - their representatives. No taxes = fewer bribes."
I don't think that is really where the bribery goes. I think operating costs are more the arena for bribes at the federal level - exemptions from regulations, lawsuit innoculation etc. Taxation is definitely an issue at the state and local level, but that is usually a matter of corporations extorting tax breaks from politicians who are electorally weak. The company stays, with tax breaks, the politician campaigns on saving jobs.
Posted by: Njorl on January 25, 2007 11:22 AMI’d be curious to see Jane’s take on the president’s proposal on health care reform that was introduced in Tuesday’s SOTU address.
Posted by: Thorley Winston on January 25, 2007 12:00 PMMark m said, "so I never thought there was any possibility Congress would go for something so much against their own interests"
Think about that for a second...here we are discussing what is best for the nation and toning down what would be best because the people power would never give it to us because it might threaten their hold on power.
Sounds nothing like a democracy to me, sounds like tyranny. Disgusting. Feelings like that make me think nothing less than the violent overthrow and imprisonment of everyone in power is needed. On the flip side, I do have a house and as long as the government is doesn't start violating my civil liberties anymore than the violations that I was born and raised to be accepting of, I guess things are just peachy.
But boy, once I start thinking about things "could and should be" I get really pissed.
Posted by: slave on January 25, 2007 6:00 PMAs long as you are doing this, raise the amount of Social Security benefits by the average amount that they will be taxed, then make them 100% taxable (after repayment of the amount you paid in).
Instantly rationalize the system to all personal income = personal income at the same rate.
This change is revenue-neutral and there is a progressivity to this tax that benefits people whose sole income is Social Security. It also eliminates all the phase-in phase-out nonsense.
Posted by: Twill00 on January 25, 2007 9:44 PM"The Canadians have a VAT that is most definitely not invisible to the consumer, because it's added at the register."
"but if Canada's parliament could have been stupid enough to make the VAT maximally visible, maybe there's hope for us..."
Just for clarity, Canada's VAT is called the GST and was recently reduced from 7% to 6%. As noted, several provinces have harmonized their provincial sales taxes with the federal GST resulting in combined rates closer to 15%.
Canadians still pay personal and corporate income taxes, payroll taxes, etc. The GST was put in place to replace an older quasi-VAT that was not paid directly by consumers but buried into the price of manufactured goods. Transparency was a key motivating factor. With GST rebates on input costs, various exemptions and modified rates for certain industries, simplicity is NOT a defining feature. The tax departments of most larger accounting firms have GST specialists.
Posted by: Sean E on January 26, 2007 12:40 PMOptimal way to abolish a corporate income tax.
When a corporate pays out dividends taxes are withheld at source and paid to the government. Assuming the highest rate of individual taxation-- say 33%.
If an institutional shareholder is a tax exempt one, it's up to them to reclaim the dividend by filing with the government. Ditto for individuals who pay less than, say, a 33% tax rate.
The problems with this approach:
- companies will seek to pay dividends via share buybacks, etc. which avoid dividend withholding
- individuals will create companies to hold their wealth, and never remit any funds. But the companies might employ the individual's family, might provide them with housing and lifestyle expenses, etc.
Posted by: Valuethinker on January 26, 2007 5:45 PMValuethinker: your 5:45 comment is are right about what companies will do if withholding is added to the double taxation. You might consider my comment of 1/23/2006 at 2:03.
It says why only retained earnings should be subject to the corporate income tax. Earnings passed along (paid out as dividends) should not be taxed as corporate income.
Many individuals already use trusts and corporate arrangements allowing them to live luxurious lifestyles while paying little tax. I have no qualms about tightening that; I just regard it as a separate subject.
Slightly off-point, but I have always thought the solution to high taxes is very simple: arrange the elimination of withholding.
Everyone writes a big honking check every month for Social Security. Everyone co-signs another of the same magnitude for the "employer's portion" (actually taken out of the employee's hide anyway, of course, but no one seems to know that).
Another for state income tax. Another for Federal income tax.
Or even better, you could do it through something like Paypal. It would take a minute or two. To enforce it, the employee doesn't get his pay until he transfers the money.
The average guy whose assets are dribbled away nowadays without even thinking about it will start noticing those 3-figure transactions pretty damn fast and start asking a few questions about whether he's getting anywhere near out of the system what's he's putting in.
Of course, this is unlikely to occur, but I'd love some Republican politician to raise the idea.
You could get rid of a lot of paper-pushing this way, too.
Posted by: Chester White on January 29, 2007 5:26 AM