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Wednesday, January 22, 2014

Scrap the corporate income tax

The idea of eliminating the corporate income tax was put forth in a NYT editorial published on January 5 of this year. Sadly this bold idea has generated little buzz either in the media or on the web. The author, Laurence J. Kotlikoff, is a professor of economics at Boston University. He is a respected academic with a pretty much mainstream political bent; not one of those supply siders that your mother warned you about. Some may even call him a liberal but whatever label one chooses to apply to him his idea is both bold and timely.
In recent decades, American workers have suffered one body blow after another: the decline in manufacturing, foreign competition, outsourcing, the Great Recession and smart machines that replace people everywhere you look. Amazon and Google are in a horse race to see how many humans they can put out of work with self-guided delivery drones and driverless cars. You wonder who will be left with incomes to buy what these robots deliver.
What can workers do to mitigate their plight? One useful step would be to lobby to eliminate the corporate income tax.
Don't expect that lobbying to be done by the K Street lobbyists. It would put their livelihoods on the line. The state of Maryland has the largest per capita concentration of millionaires of any state and that wealth does not come from dredging oysters out of the Chesapeake. It is because of this band of political insiders that the corporate tax code is unfair, unwieldy, and inefficient, a relic from the days of William Howard Taft. It was a progressive attempt to punish the wealthy before there was a personal income tax. It's chief victim has been the middle class and it has proven to be powerful campaign fund raising tool for members of the House Ways and Means and Senate Finance Committees who write the tax code.
President Obama speaks of "expenditures through the tax code" meaning tax loopholes written to benefit favored constituencies. His problem is not with the slimy process but rather which constituencies will be favored. Elizabeth Warren, Henry Waxman, Tom Harkin and those who know best which groups should be punished are oblivious to the plight of the employees of firms that are out of their favor and seek to put moral vindictiveness in the form of higher taxes. Capital has legs and the wealthy can move to friendlier tax environments but the stiff who works on the line cannot leave and pays the tax in the form of lower wages.
In 2012 the corporate tax produced $351 billion in revenue, less than 10% of total tax revenues but it extracted a burden horrific on middle class households in the forms of lower wages and higher prices. The revenue lost from the elimination of the corporate could be made up by increasing the personal tax level slightly. On the other hand a President Rand Paul could find $351 billion in budget cuts before breakfast.
Using neoclassical economic assumptions without extreme supply side or demand side projections Professor Kotlikoff's model predicts;
Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent.
An across the board 12 percent increase in real wages! We have not see anything like that since the hay days of the 60's.

I sincerely hope this is not the last post I write on this subject. The Tea Party is missing a huge opportunity if it does not get behind this reform.

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