January 01, 2016
Noam Scheiber had a good discussion yesterday in the NYT on recent changes in tax shares. The piece commits one major sin when it discusses the desire to lower the tax rate on capital income as stemming from a desire to reduce “double taxation.” The logic of this argument is that profits are taxed at the corporate level, so when they are taxed again at the individual level when they are paid out as dividends or lead to capital gains, this amounts to “double taxation.”
The problem with this logic is that the government gives individuals something of enormous value when it allows them to create a corporation as a legal entity. A corporation enjoys a wide range of privileges that these people would not have as individuals, most importantly that it allows them limited liability. This means that the individuals who own shares in the corporation are not liable for any harm the corporation may do beyond the value of their shares.
We know that limited liability and other benefits of corporate status have great value because people choose to incorporate. They would not do so, and save themselves from having to pay the corporate income tax, if they didn’t think the value of corporate status exceeded the burden of the tax. In this sense, the corporate income tax is a 100 percent voluntary tax, people opt to pay it in order to get the benefits of limited liability.
There is one other point that would have been useful to include in this discussion. Taxes affect the before-tax distribution of income insofar as they allow for a lucrative tax avoidance industry. To a large extent the private equity industry, which has created rich people like Mitt Romney and Peter Peterson, is about devising ways to raise corporate profits through tax avoidance. This is an important cost associated with having an excessively complex tax code. That is an important point that is always necessary to keep in mind in any discussion of the tax code.
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