The Magazine

The ‘Open for Business’ Tax Plan

Let’s eliminate tariffs and corporate taxes.

Dec 31, 2012, Vol. 18, No. 16 • By ANDREW MOYLAN and ELI LEHRER
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Zeroing out the corporate income tax, on the other hand, would make the United States dramatically more competitive. The benefits of such a policy would also be more broadly distributed than just about any other similarly sized tax reform one could contemplate. Most important, it would likely raise workers’ wages and benefit consumers.

While the literature on who actually “pays” corporate taxes (what economists call “tax incidence”) is complicated, it’s clearly impossible for corporations themselves to pay taxes, since they are simply composed of individuals. Taxes assessed on a corporate treasury are inevitably passed on to three groups: shareholders, employees, and customers. While most corporations will pass on some burdens to each of these groups, employees are often the most vulnerable. After all, consumers can usually find competing products and shareholders can sell the stock. Unless their skills are in high demand, however, workers have to go through a long search to find other employment.

One study, from Harvard and the University of Michigan, finds that as much as three dollars out of four in corporate taxes are paid by a company’s workers. The Congressional Budget Office, likewise, finds that ordinary individuals end up paying most of the tax. And as with tariffs, there’s reason to suspect that low- and moderate-skilled workers who are unable easily to switch jobs and who spend a large portion of their income on consumer goods bear a disproportionately larger share than the executives that populist advocates imagine pay the bill.


 

While the roughly $240 billion the federal government collected this year in corporate income tax isn’t pocket change even by Washington standards, it’s not so large that it would be impossible to do without it. Part of the lost revenue would be paid through higher dividends, capital gains, and incomes that would result. (The money has to go somewhere, after all.)

Finding a replacement for the remaining foregone revenue would require some other source. While many on the left likely would suggest simply raising personal income taxes on the well-off, it might also make sense to look at broader sources of revenue, like taxing consumption, energy use, industrial pollution, or a carbon tax that might combine all three.

A zero corporate tax isn’t quite as radical as it sounds. Most of the other 33 countries in the Organisation for Economic Cooperation and Development already have “territorial” tax systems that only tax profits earned within their borders. The “worldwide” tax system of the United States adheres to no such limit, and, as a result, companies try to attribute as much income as possible to lower tax, non-American jurisdictions. Every truly large non-U.S. company already has some never-taxed profits, so long as they never repatriate their earnings (something Ryan and other Republicans favor letting U.S. companies do too). Eliminating America’s corporate income tax would, in part, just level the playing field and bring more business operations under U.S. jurisdiction.

The politics of eliminating the corporate tax, although sure to arouse populist drum-beating, might not be quite as difficult as they seem at first blush. The idea has gained some real currency on the left, where advocates like former Labor secretary Robert Reich have argued convincingly that doing away with the corporate tax would not only raise wages but also reduce corporations’ incentive to play politics in the first instance.

A policy of zero tariffs and no corporate income tax is practical and would do immense economic good. Beyond its obvious benefits for consumers and the economy as a whole, such a policy would send the world a clear message that America is a global competitor with its doors wide open for business.

Andrew Moylan is outreach director and senior fellow and Eli Lehrer president of R Street.


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