Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

No corporation pays taxes

Jerry Stratton, September 15, 2011

Congressman Paul Ryan is doing a great job explaining what we need to do to let the economy turn itself around, rather than shackle it to a permanent depression. His videos are simple, honest, and to the point. In his latest, he talks about leveling the corporate tax rate playing field by removing loopholes and lowering the overall rate so that the overall rate is revenue neutral.

I disagree with Ryan’s formulation of the problem, however. He says that some corporations pay taxes; and some corporations pay lobbyists to lobby for loopholes to not pay taxes. In fact, no corporation pays taxes. Some corporations, as Ryan says, choose to hire lobbyists to reduce their tax burdens, thus allowing them to pay higher wages or charge lower prices for their products. Other corporations choose to take the full tax burden and pass that burden on to their customers and their employees.

No corporation pays taxes, because corporations exist to provide goods or services. Every cost that goes into making those goods and services either raises the price of the good/service, or lowers the wages that can be paid to employees. The money has to come from somewhere, and it comes from the cost of what the business sells or how much their employees make. It is the consumer and the employee who pay those taxes. Otherwise, the corporation would go out of business—you can’t sell something for less than it costs to make it, and stay in business. Corporate taxes are an invisible tax on consumers and employees. They are a sneaky sales or income tax increase.

The difference between the two models is, which behavior do we want to encourage? One in which businesses are experts at making some product or providing some service, or one in which businesses are experts in lobbying Washington DC?

Ryan said that: “Every dollar that companies spend lobbying for a better tax deal is a dollar they’re not spending making a better product… We don’t want a tax system that rewards people for coming to Washington and getting special favors.” But his proposal doesn’t fix that. His proposal lowers taxes for those who don’t hire lobbyists, and raises taxes for those who, in the past, did hire lobbyists. In general that’s good, because it is, as he said, fair. It evens the playing field.

But just lowering the corporate tax rate doesn’t change the need to hire lobbyists to “go to Washington”. As long as corporations have to pay the tax, politicians will be tempted to raise that tax. Politicians will be tempted to raise the tax from 26% to 26.5%, or 26.5% to 27%, or 27% to 30%. Politicians will be tempted to add an additional 5% tax on corporations that make fattening foods, or an additional 10% on corporations that don’t make electric cars. Or, worse, politicians will be tempted to create some complex formula for determining how much the extra tax should be depending on what kinds of fattening foods the business makes, how much fat they make, and where they sell it—a complexity that will cost the business not just in extra taxes but in extra accountants to figure out the tax.

Each tax increase will be met with resistance, but the proponents of the tax will say it doesn’t add any real burden. Raising from 26% to 26.5%? That’s not going to kill the economy. Just raising taxes on this one subset of corporations isn’t going to kill the economy. And so on. But the total tax and regulatory burden will combine to bring us right back to where we are now: a mess of loopholes and inconsistent taxes in a system of cronyism.1

These two factors—that corporations don’t pay the tax, only consumers and employees do, and that any simplification and leveling now will be lost later—is why it makes more sense to remove the corporate tax entirely. When corporations don’t have corporate tax lawyers, any tax levied on them is a big deal, because it means they have to start becoming experts in tax law again. A change from 26% to 26.5% isn’t a big deal, but a change from not having to deal with it at all to 0.5% is a huge deal. From the political side, it’s a lot easier, politically, to change a tax from x% to x.5% and keep ramping it up, but it’s a much bigger deal to create an entirely new tax.

Not having to be a specialist in that aspect of tax law or in political lobbying means that businesses can focus more on expanding their core business, making more jobs in the process. This is the change we need to make if we want our businesses to be experts in making great things, rather than experts in “going to Washington”. It also fulfills my own three rules on taxes, that they be simple, unobstructive, and obvious. Consumers and employees pay the corporate tax rate now, they just can’t see it. Consumers and employees pay for corporate tax lawyers as well.

In response to Simple, obvious, and unobstructive: minimize the value-minus of taxes: There is no value-added in taxes, but we can minimize the loss of value.

July 25, 2014: Abolishing the corporate income tax gains steam

Abolishing the invisible tax called the corporate income tax has surprisingly gained new supporters since I wrote No corporation pays taxes. Megan McArdle wrote on Bloomberg View that:

The problem with this extended chess game is that every move is very costly. First, it adds to the complexity of the tax code. With every new rule—no matter how earnestly said rule attempts to close a “loophole”—it becomes harder to know whether you are in compliance with the law. This is true on both sides; corporate tax law has now passed well beyond the point where it is possible for a single expert to be familiar with its ins and outs. This makes it harder to plan business expansions, harder to forecast government revenue, and it requires both sides to hire more experts in order to determine whether corporations are compliant. It also means more lawsuits, and longer ones, as both sides wrangle over how this morass of laws should be applied to real-world situations.

The corporate income tax makes it harder to create new businesses because you can’t just become great at making your new widget; you have to become great at understanding and influencing Washington, DC. Which means that many people who would otherwise create thriving new markets with new jobs don’t.

John Steele Gordon at Commentary adds to this, noting:

Megan points out that abolishing the corporate income tax would bring howls of protest from the left that corporations aren’t paying “their fair share.” But corporations, of course, don’t pay the corporate income tax. Instead it’s paid by some combination of workers, with lower wages; customers, with higher prices; and shareholders, with lower profits. The particular combination depends on the economic circumstances of each industry. And abolishing the corporate income tax (which was, anyway, only intended to be a stopgap until a personal income tax amendment could be ratified) would have many extremely positive effects for the American economy.

He goes on to list several benefits of ending the invisible income tax and invisible sales tax that we call the corporate income tax.

And in January, economist Lawrence Kotlikoff wrote in the New York Times that:

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April 8, 2013: All your income is the government’s
He wrenched out that crocodiles toof!: From page 380 of Sylvie and Bruno

If the federal government isn’t eating you, that means it’s subsidizing you! Pray that the mouth doesn’t clamp shut while you’re yanking that tooth.

According to “Martin J. McMahon, Jr., a tax-law professor at the University of Florida”, that which is not taxed is a federal grant. He’s complaining that the free food that Google employees get from Google is paid for by the federal government1:

"I buy my lunch with after-tax dollars," said Mr. McMahon, the University of Florida professor2. "And I have to pay taxes to support free meals for those Google employees."

He wants the IRS to send auditors out to determine the worth of what Google employees eat, because if the government isn’t taxing it, the government must be paying for it. This is the same mentality that says, if the government doesn’t pass laws against it, the government approves it.

It’s utter bullshit. Your taxes are subsidizing lots of crazy things—such as, for example, the University of Florida—but they do not subsidize free meals for Google employees. The money you pay to use Google products—whether directly or through advertisers—pays for free meals for Google employees.

Whether it’s free parking, free lavatory soap and toilet paper, open gyms, or free food, employers provide all sorts of amenities to help keep employees on site. Employees and customers pay for these amenities, through lower wages and higher prices. Some employees use these amenities more than others. It is not a given that these amenities need to be taxed as employee income.

But while it may or may not be right not to count free meals as part of their compensation package, not taxing it doesn’t make it a federal grant—not unless you believe that all incomes are the federal government’s, that federal employees dole out our portion to us according to their whim.

When did the left take over the old Puritan fear that some employee, somewhere, might be having an untaxed good time?

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February 22, 2012: Vodka Economics

It’s nice to every once in a while beat the big guys to the punch. The VodkaPundit “got this fantastic notion this morning, when I remembered an Econ 101 lecture given by Prof. Walter Johnson at Mizzou twenty-mumble years ago” that “corporations don’t pay taxes. Not one red cent. They never have and they never will”.

It’s a brilliant notion: Everyone is brilliant who agrees with me.

Stephen goes on to describe in detail how corporations never pay taxes:

Assume a perfect world—one with no taxes. When you’re done laughing and/or crying, please follow along.

Let’s say Corporation D is smart and lucky enough to show a profit—and in our perfect world, it doesn’t need to form any shelters to dodge any taxes. What does Corp D do with the money? It has several choices, including:

  • Hire more workers
  • Pay dividends
  • Increase pay and/or benefits
  • Deposit a rainy day fund
  • Invest in expanded production or merger

Now, perfect worlds never last, so let’s say some smart laddie gets himself elected President, sees all that money Corporation D made, and says, “Those greedy corporations need to pay their fair share!” And Congress goes along and imposes a 25% tax on profits. What happens next? That tax gets paid, all right.

It gets paid by the new workers who weren’t hired, by the retirees and mutual funds who got smaller dividend checks, by the employees who didn’t get a pay raise, by the banks who got smaller deposits to loan out, by the entrepreneur who couldn’t get a loan, and it’s paid by each and every one of us, in the form of reduced investment and lower economic growth.

Yes, Corporation D holds the receipt for taxes paid. But the money came out of our hides, not “theirs.”

I’d add (and he includes this in Professor Johnson’s example about rent) that “it gets paid by the people who buy their products and services”.

Corporations don’t pay taxes. Never have, never will. Corporate taxes are an invisible tax on workers and customers. They’re very hard to fight politically; it takes a courageous politician to call for ending this hidden tax; but every tax increase is ultimately paid by you and me: people who earn a wage and people who buy food, gas, and, when possible, fun toys. Every tax increase is ultimately paid for by workers and consumers. Remember that as Obama talks about raising taxes on dividends—or whatever “fair” tax increase he comes up with tomorrow to hide the taxes he wants to levy on you and me.

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  1. In the comments of Palin v. Crony Capitalism, Carl from Chicago writes that “People view corruption as an ‘error in the system’, but in fact it is the ‘system’.” I’d add that people view loopholes as an error in the system, but they are an inevitable part of the system.

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  1. <- How to raise taxes
  2. National sales tax ->