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Home Publications Blogs Beat the Press Jared Shoots Back on the Corporate Income Tax

Jared Shoots Back on the Corporate Income Tax

Wednesday, 27 August 2014 08:54

Jared has a few more points in response to my least post -- certainly very reasonable concerns. As far as his comparison of me to Mr. Burns, I'll just say "excellent!"

Comments (9)Add Comment
written by watermelonpunch, August 27, 2014 9:35

I think this very animated & interesting argument about corporate taxes shows that there are, unfortunately, no easy answers.
Combating perverse incentives is a never-ending fact of life where a black & white viewpoint, or looking for a surefire bet, could get you to throw away babies with bathwater.

It's a situation of picking what the majority sees as the lesser of 2 evils, and then having the set-up to properly keep an eye on the results, and adjust them as necessary.

But that's big government to some people, so they'd rather toss babies.
The likes of Mr. Burns would have us toss babies perhaps, but I highly doubt either Jared Bernstein or Dean Baker would!
case closed
written by pete, August 27, 2014 10:26
Jared seems concerned that corporations will retain earnings rather than pay them out. How in the heck does this money get spent, since he calls it "income." Without dividends, indeed, corporations do retain their income. But that doesn't buy a house. Bill Gates initiated dividends when the tax rate on dividends fell. He wanted to get some cash but not sell his shares. It was a slam dunk. Rumor is that after Buffet Berkshire will begin dividends. The income will flow. Currently Berkshire has about $55B of "cash" (i.e., short term US treasuries). This will either be invested or given to shareholders, other wise only earning .5% or whatever a year. Silly argument.

Tax avoidance, where our accountants and corporate lawyers flurish, is surely unproductive labor. Funny thing is, Dean, there are many other areas of the government where capture has occurred, such as health care. Very similar arguments could be made against the current health care laws. I think Mr. Wholefoods made this argument in 2009.

Tax Policy in the Future
written by Robert Salzberg, August 27, 2014 10:48
Today's political climate won't allow any revenue raising tax reform. Ending the corporate income tax and replacing it in a revenue neutral way is remotely possible. Great to see Dean Baker put out logical alternatives.

Republicans are in a demographic death spiral so as long as America clings by it's fingernails to it's grip on Democracy, eventually we will have a Congress and a President who realize that carbon taxes, revenue raising tax reform, and rational investments in education, research, and infrastructure are worthy policies.

It has been 28 years since the last major tax overhaul. Why not design a tax system that is best for Americans? Why not sooner rather than later?
Retained earnings
written by BillB, August 27, 2014 1:53
Retained earnings are not a problem. They are already taxed for S-corps. The tax obligation for all profits in an S-corp are passed to the shareholders, whether retained or not. For S-corps this is done through a Form K-1, but you could just as easily do it with a Form 1099. Just as now you get a 1099 for distributed dividends, you could also get a 1099 for retained earnings.
Tax shelters
written by BillB, August 27, 2014 2:11
I don't understand this concern about people using a tax-free corporation as a tax shelter.

This problem is already handled for S-corps. The tax obligation for all retained earnings are passed to the shareholder, whether distributed or not. There are no tax-free earnings in an S-corp. The shareholders must pay taxes on all earnings. You could eliminate the corporate tax and treat all C-corps as pass-throughs just like an S-corp. The shareholders pay taxes on all earnings. Nothing goes tax-free.
written by skeptonomist, August 27, 2014 4:39
Is an S-corp not a kind of tax shelter in itself, in that owners avoid the double taxation of C-corps, while retaining the advantages of limited liability? I speak in ignorance of the many details and requirements. Presumably providing the knowledge of these details is part of the avoidance overhead that Dean is talking about.
The Political Problem
written by sherparick, August 28, 2014 10:40
The political problem with abolishing the corporate tax is that it is hard for me to see the Republicans agreeing to any replacement that would require the Rich to pay more such as taxing all dividend income at ordinary income rates and raising the capital gain rate to ordinary income levels. I also expect a new tax gaming industry to form around a method of individuals incorporating themselves and having their "corporations" receive income and hold property so that they themselves will have to pay no individual taxes on it.

I also would love to see a financial transaction tax a a replacement, but 1) there would have to be some international agreement on its terms and 2) probably have to be passed over the dead bodies of the Democratic Senators of New York and Chicago (NYSE, Chicago Board of Trade, etc.)

I often thought about having a carbon/energy tax and a VAT, part of which would be refunded to all households who pay tax say at a rate of $2,500 per taxpayer and Dependent and to increase the Earned Income Tax credit and flatten its curve so the loss of the credit does not create a huge marginal tax increase. But again, with a Republican House and a Senate needing 60 votes from a lot of Senators who listen only to other rich people, how likely is that?.

This is why I found Jared Bernstein's criticism of the proposal from aspect of "political economy" and "political science" most tellling
written by BillB, August 28, 2014 6:23
Sherpatrick said: " I also expect a new tax gaming industry to form around a method of individuals incorporating themselves and having their "corporations" receive income and hold property so that they themselves will have to pay no individual taxes on it."

We don't have to invent a new tax system. We already have S-corps. You can't avoid taxes in an S-corp by holding it in the corporation. The shareholders pay taxes on corporate income whether you hold it in the corporation or take it out as dividends. There is no gaming of the tax system.
written by David, August 28, 2014 9:11
Business owners typically elect the S-Corp as a long term tax strategy. If they didn't want their business income taxed personally they could elect to change to a C-Corp.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.