Auditing the Corporate Income Tax
2021-05-23 · Guest: Richard Rubin (Wall Street Journal tax policy reporter) · 52:31
Corporate income tax policy and economic impact
Bob Zadek and Wall Street Journal tax policy reporter Richard Rubin discuss the complexities and misconceptions surrounding the corporate income tax. They explore who actually bears the burden of these taxes—arguing that corporations are merely intermediaries for individuals—and analyze current policy proposals like the global minimum tax and the tax strategies of major companies like Amazon.
Topics: Corporate Income Tax, Tax Policy, Global Minimum Tax, Janet Yellen, Amazon, Tax Competition, Economic Incentives, Labor vs. Capital
Speakers:
- Bob Zadek: Host
- Richard Rubin: US Tax Policy Reporter for the Wall Street Journal
Introduction to Taxation [00:17]
Bob Zadek: Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. This show, this Sunday and always, of ideas, never once the show of attitude.
This morning’s topic may strike you as being a tad unpleasant. It is the subject of taxes—taxes in general, but this Sunday we’re going to refine it a bit. We’re going to talk about federal taxes. Now, a pretty unpleasant topic. It has negative connotations, as it should. And it is a topic in which almost everybody who has a pulse has a strongly held belief about taxes. They disagree, they being one versus another, disagree on the content of that opinion, but they all have an opinion on taxes.
And you know what? Many of the opinions are a bit uninformed. They are based upon perhaps a misunderstanding of the dynamics of government taxation, specifically federal income taxes. Many people, they know it’s money out of their pocket into someone else’s pocket, but they don’t quite know the dynamics—how much they are taxed, who it goes to, and who it benefits.
And I’d like to introduce this subject with a thought that I ask that you keep tucked away in the back of your minds during this hour. And that is the following: Everybody wants their wealth, their income, their money to be spent for their benefit. And when I say benefit, I mean benefit broadly. It may benefit you emotionally, psychologically, to give the money away. That counts as a benefit. It might benefit you to spend it on yourself, on your loved ones, on strangers. All of that is a benefit.
The subject of taxation for the next hour is simply a subject of to whom and how do you spend that dollar which you own, that $100? How do you spend it? Who will be your well-being vendor? Who will you give the money to to enhance your well-being? After all, it’s your money, and every bit of it should be spent to enhance your well-being. Now, government is a provider of your well-being. Government, in theory, protects you and spends money for the public good. Public includes you. Other vendors in private business are vendors to accept your money and give you in exchange well-being.
So this topic, I think you will find during the hour, is simply helping you decide as to the dollar of money you are going to spend, who will be your well-being vendor? And that is the topic of this morning’s show. In taxation, government says, “We will be the vendor of your well-being. We will provide you with well-being for the money you spent.” They simply are out there competing to be the well-being provider. And the question is, will they give you the most well-being for the dollar you give them?
This is not a complex topic once you understand how taxation in general and federal taxation specifically, how it really works, and where are the hidden taxes—the taxes that the government has become skillful at taking from you, taking tax dollars from you in a way you don’t even know they’re doing it. They are the ultimate, the stealthiest pickpocket there ever was.
To help us understand this, so you can keep your pockets tighter—don’t let government tax you behind your back—I’m happy to welcome to the show, it’s an honor for me to welcome to the show, Richard Rubin. Richard is the US tax policy reporter for the Wall Street Journal in Washington. And of course, he focuses on taxes, politics, and economics. Taxes, politics, and economics is really just taxes divided into subcategories. And I should mention to my friends out there that through a process of attrition, the Wall Street Journal has become the only provider of objective news that I allow to have access to my brain. I have culled the herd, and they are the last media outlet standing. So I rely heavily upon the information I get from the Wall Street Journal in making my personal decisions, and I rely specifically on my tax tutor, Richard Rubin, to help me. Richard covered tax policy at Bloomberg in his past and the Congressional Quarterly, and he’s written extensively about local governments and transportation policy for quite some time. He started his career, I believe, with the Charlotte Observer. Richard, thank you so much for joining us this morning and welcome to the show.
Richard Rubin: Hey Bob, thanks for having me. Appreciate being here.
The Corporate Tax Burden [08:27]
Bob Zadek: Now, tax policy, specifically federal tax policy—and we are going to winnow it down even more to talk about corporate tax policy because it is so much in the news. President Biden, not surprisingly because he announced his platform before he was elected, is determined in his continuing effort to—oh my goodness, I hate to say it because it’s so not true, but “tax the rich.” And his way of taxing the rich is to increase corporate income taxes.
Now, when we say corporate income taxes, we don’t mean corporation as a form of business, but we mean the phrase more broadly to mean tax business. And in general, Donald Trump in 2017 lowered the corporate income tax, the business income tax, which most people agree with a beneficial effect upon the economy. And Biden is determined to take back or reduce or increase back up part of the way the corporate income tax.
So let’s start with Richard, if we may, the subject of corporate income tax broadly, and the subject which has been studied a great deal. There tends to be, in the broad sense, agreement among economists and those who study tax policy on the question—and this is my question, Richard: When one taxes a corporation, economists fully understand, and you have explained to us so often, that there’s no such thing as taxing a corporation. Corporations do not pay taxes; they merely are tax-collecting intermediaries. If you agree with that concept, please explain it for our friends.
Richard Rubin: Yeah, so I would generally agree with that concept, that corporations you can think of them as collections of people, right? Corporations are collections of shareholders, bondholders, employees, executives, to some extent customers, who sort of come together to conduct business. And so the corporate income tax importantly is a tax on a business’s profits, right? So the government is saying, “We will take a share of what you make every year.” And so the higher this is, this is something that obviously more profitable firms care more about.
And so the question is, okay, if a company is making a whatever profit margin and is paying a percentage of that to the government, where does that come from? Where does that burden ultimately land? It doesn’t stay in the company; it goes to some of those people who ultimately pay it. And so this is something that economists study and argue about and disagree on. But there’s basically two big broad categories: one is it goes to capital and the other is it goes to labor.
Capital you can think of as shareholders. That if you, you know, a company is making profits and it is taxed more, then the shares it owns, you know, the shares of that company are worth less. The company can return less money to shareholders as dividends. And so shareholders are the ones who are burdened. And we’ll come back to who those shareholders are because it’s really important.
And then the other side is labor. That like companies find other ways to share that tax burden, to pay that tax burden. That in the long run, maybe they pay workers less because the chain of events is basically this: that if that company is, you know, might consider productivity-enhancing investments, if the after-tax rate of return is going to be higher. But if the after-tax rate of return is going to be lower, then they don’t invest as much in the business. Those investments, like machines, don’t make workers more productive, and therefore in the long run, they can’t raise workers’ wages as much as they might otherwise.
And so that’s the sort of big tug and pull. Government estimates kind of say it’s about, you know, three-quarters on the capital side and one-quarter on the labor side. More conservative economists say it’s closer to even. Some thought that in the short run it’s more leaning toward capital and the long run it’s labor.
But I want to come back and talk about who the shareholders are because it goes back to your point, Bob, about taxing the rich. Shareholders do tend to be, you know, wealthier and higher income than the population as a whole, right? That makes sense. Low-income households don’t own as much in the way of stocks in the world or their share of the population. Stock ownership is very concentrated. But it’s also widely distributed, right? This is when we talk about shareholders, that also includes 401(k)s. And so even if there’s not a tax, in some ways that’s being taxed even though there’s no actual tax that you’re paying on your 401(k) until you take the money out.
The other big piece, and this is an important part of the debate right now, is a big portion of the corporate shareholders are foreigners. You know, foreign investors like the idea of investing in US corporations, as they might if you want to own a piece of, if you’re say a British citizen and you want to own a piece of Apple or Facebook. Then if those shares go slightly down in value, then you’re sharing that tax burden. There’s one other way that people now see, particularly Democrats kind of see the corporate income tax as a way to tax foreigners. You can think of it like the car rental tax in Orlando, right? You know, there’s a really high demand and the local government there captures some of that demand by imposing a tax. And so the corporate income tax, US equities are in some ways unique, and so the thought is the US can tax people—it is kind of basically taxation without representation, but the US is the one taxing and they don’t complain about it. But it’s the US then taxing those foreigners. And then the question becomes how much does that reduce investment? If the foreigners say, “Well, I’d rather just invest in, you know, Siemens or Mitsubishi or whatever because the US is raising taxes,” that’s, you know, like renting a car in Orlando, then I’ll just go to like Austin or something and rent a car there and it won’t be as expensive.
So that’s sort of a long-winded starting point to this, but the idea is that corporate income taxes get paid by someone. Who that someone is matters. We don’t necessarily know, but it’s generally more higher income and foreigners than the population as a whole.
Bob Zadek: Just to modify very slightly what you have said, because you used the phrase “widely distributed” referring to who owns equities. And I just want to expand upon that a tiny, tiny bit. Of course, and you mentioned 401(k)s, but of course, union pension funds own equities, and life insurance companies own equities. Now, why do we care about life insurance companies? Because life insurance companies sell life insurance, duh, and they sell it to all segments of the economic strata. So low-income people probably have some life insurance, and therefore they pay premiums. And if the life insurance company’s investment division is more profitable—that is, their income is taxed lower—then they will over time, if you have any faith in the markets at all, they will lower—that will be reflected in lower premiums.
So even though, Richard, you have shared with us the conventional wisdom that when corporations pay taxes, that doesn’t in any meaningful way result in higher prices—and that’s because of the fact that the economy now is global, and corporations don’t have the freedom to simply raise taxes, they become less competitive with their foreign competition, so therefore it doesn’t find its way because of the market in price increases very much—but it does find its way into coming out of the workers’ pockets and coming out of the shareholders’ pockets. And as I just said, shareholders, while of course it means “the rich” in a meaningful degree, but as I have just said, it means everybody.
So therefore, when government, when the federal government says, “Let’s increase corporate taxes,” you have to learn to read between the lines. They are saying—no, they are not taxing corporations. That is the direct effect, but they are taxing the, as Frédéric Bastiat observed, the unseen. They are taxing workers and they are taxing equity holders directly and indirectly. So Biden should be saying, “I am secretly taxing these individuals, and I’m hiding behind the political cover of saying I’m taxing a corporation,” as if a corporation is your next-door neighbor. But only people pay taxes one way or the other. So that is kind of disingenuous and it’s economically inaccurate.
Global Minimum Tax Proposal [17:19]
Bob Zadek: So the decision to support or not support a corporate tax increase is a decision to support or not support a secret tax on select and widely dispersed individuals. Now, as to corporate taxation, there’s been a lot in the news lately about Janet Yellen’s plan. And wow, does it strike me as being insidious—of negotiating with our trading partners in Europe and in Asia, the first-tier economic powerhouses countries, to have all countries to agree, in effect, to enter into a—what if in the private sector, they’d all go to jail because it’s monopolistic practices—but Janet Yellen is trying to get all countries to agree on some minimum corporate tax so that countries like Ireland and Estonia and lots of other countries which have enhanced their country’s economy by wooing corporations because of lower corporate income taxes.
So tell us a bit, Richard, because you’ve written about this. Tell us what’s going on and give us your opinion on the Yellen proposal to, in effect, enter into an agreement in restraint of trade—that’s my label, not the economic label—an agreement in restraint of trade to get all countries to conspire so there is no tax haven for corporations on earth. Tell us about the dynamics, what that will do, what your opinion is on the Yellen proposal. Tell us what’s going on there because it is, in my opinion, a big deal.
Richard Rubin: Yeah, it’s absolutely a big deal. It’s still sort of developing, and it’s developed over time. There had been discussions about a sort of minimum tax even before this administration took office, and the Trump administration was, you know, not as adamant about it for sure, but was heading in this direction as well.
The idea is to basically sort of put a floor under corporate taxes globally. That each—and you don’t need everyone, you kind of really need just the major countries. If you got the G20 on board on this—and then we can talk about the US backstop and penalty on how they’d enforce this—but to get a G20 on board, there really wouldn’t be much place to go.
The idea is that companies should pay, that there shouldn’t be a way to like escape all corporate taxation. We had a long period of years where companies were able to kind of route corporate income through Ireland to Bermuda or the Caymans where it wasn’t taxed, and then eventually some of that accumulated income. But the idea is to prevent that from happening again, to have—you can call it whatever you want—but to have an international agreement, like we have on all sorts of other things, to create that kind of floor.
The US recently kind of said, “All right, we’re, you know, initially was kind of making noises around the 21% floor.” More in the realm of that it would accept 15% as a floor. So the idea is if you’re a company headquartered in Ireland or a company headquartered in the UK, that like you would have to pay 15% on your foreign income. Interestingly, the US is actually the only—is one of the few or only large countries that has something like this now. It was created in the Trump administration, a 10.5% minimum tax on US companies’ foreign income. Like it exists now, companies are paying it, they’re not thrilled about it. And so in some ways what the US is trying to do is increase our minimum tax and then also get other countries to do it.
And the last thing that’s part of this is sort of the hammer, the way the US can enforce this. If you get a bunch of countries in and there are some potential outliers, the US has what it’s calling the SHIELD proposal, which basically says—if you’re operating—again this goes back to the car rental tax analogy—that the US market is so big and so attractive that companies really need and want to be here. Any global company of any particular size needs to operate in the US. And so the idea behind the SHIELD says, “All right, well if you’re operating in the US and you are sending profits back to some country with a with a very low tax rate, then we will just deny those deductions to your US operations,” which is basically the same thing as taxing it and therefore impose a very large tax on companies headquartered in countries without minimum taxes. And that will either punish them or induce them to join.
So it is a case of—again, Congress would have to approve all of this, which is its own set of complications—but the idea is the US and other countries using their economic might to get money out of large companies, to make sure there’s some minimum level.
Bob Zadek: And it is anti-competitive. The phrase you often read about is a “race to the bottom.” The US has concluded that for countries to compete for corporate business investment by inducing companies to come to their—to be domiciled in their country, and the inducement is lower taxes, that is tax competition. “Come here, our taxes are lower.” States do it and countries do it. And the US has said, “Let’s get rid of the competition by having us all sign this anti-competition, anti-race to the bottom, so we all agree that corporations will have no place to hide.” And therefore, now the US has no need to use tax dollars efficiently and to lower tax rates because they’re not going to lose any taxpayers.
The Purpose of Taxation [35:37]
Bob Zadek: So if we have—and I have called it sort of—it’s like a minimum wage for taxation, where no one is allowed to pay less than a certain amount. It’s the same as minimum wage. And by the way, I’ll mention as an aside, what’s interesting is in a somewhat stealthy way, the Biden administration in one of their pending tax bills—some recovery act, they all have the word “recovery” in there, and I always ask myself, “Recovery from what? We’re doing just fine,” different subject, different day—but the Biden administration has tried to, in their domestic tax policy proposals, prevent states from using this wealth they’re getting from the federal government. States will be prohibited from using that money to reduce their state taxes. Of course, Biden doesn’t want that to happen because New York and California and Illinois are at a tax competitive disadvantage because their taxes are high. And as you know, corporations and individuals are voting with their feet. And Biden is determined to eliminate any tax competition, whether it’s between states or between countries. So it’s all consistent with this fear of competition.
Now, Richard, what do you think, assuming Yellen/Biden succeed, what will be the effect on, if any, on the American economy, on the world economy, and more importantly, on Richard, you and I and the people we love?
Richard Rubin: So I think one thing that I watch in this respect is what is rate gaps, right? Like so there still can be arbitrage opportunities for companies. If the global floor say is 15, and you know, say you can pay a minimum of 15% as a company headquartered in Ireland or the UK or Spain or whatever, and but the US domestic tax rate is 25—the administration wants 28 but that’s clearly not going to happen—and the US says that US-based companies have to pay 21% on their foreign income, and there’s a whole complex set of rules there but we’ll leave that aside, just take the sort of clean example of like, or 18. If the spread is three points, five points between a US-headquartered company and a foreign company, like that’s going to cause—that matters, right?
Taxes matter. My general mantra of approaching this is basically taxes matter but not as much as you might think. So taxes matter, and companies will say, whether it be through inversions themselves or through US companies—not the giants, but still sizable ones—getting bought by companies from other countries, or for startup IPO stuff to happen more with non-US domiciled companies than US companies. Those are the sort of the margins to look at, the places where you might see. And then, you know, to the extent that that headquarters location is where jobs and research and things we actually care about—right, we don’t care where a company’s paper address is except to the extent that it’s economically to the country—we don’t care except to the extent that there are jobs and growth associated with it. So maybe that, you know, that’s the margin that you talk to Republicans that they’re concerned about, that companies will find ways to not be American and that their jobs that go along with that.
The counter to that would be like, look, we just cut corporate taxes a lot and did the economy really kind of do all the things that they said it would do? And then, you know, maybe taxes don’t really matter so much and that there’s there are lots of what you might think of as—to use the loaded economic term—but like excess profits. Are companies making so much profit that like you can tax them and they’re not really going to change their behavior very much at all? And so that’s—I think, you know, it’s an unknown, like all this stuff, and there’s certainly some potential effects that might happen. And I’m sure we’ll, you know, as we get the a more clear sense of the mix between what the global deal is, what other countries do, and what the US Congress agrees to, we’ll have a better feel for how that might shake out.
The Amazon Tax Myth [28:59]
Bob Zadek: You have written a lot about my favorite company, only because I’m such a consumer of their goods and services, and that company is Amazon. And there has been a lot of hyperbole in the media that Amazon, with all of its enormous economic well-being—the phrase is, and of course it is dead wrong, but I’d like you to speak to it because there’s so much misunderstanding, Richard—that Amazon pays no taxes, followed by five exclamation points. And Amazon, of course, is not a tax cheat. If it pays no taxes, it pays no taxes because that’s what the tax law says. And Amazon and its management do not have to go to jail; they are simply complying with the law. So speak to this whole issue of so that when our friends out there read or hear that Amazon pays no taxes, therefore we need a corporate minimum tax—we’ll get to that in a second—tell us whether that—help us read between the lines of “Amazon pays no taxes!”
Richard Rubin: Yeah, so let’s unpack that a bit. The first set of things that is a measurement challenge, right? Just like your tax return is private and so is mine, so are corporate tax returns. So when people are making these judgments based on financial statements, and their financial statements often are—can give you a close approximation of the tax return but don’t actually give you a year-by-year blow-by-blow kind of take. A really simple example: if a company has is being audited based on stuff that it did in tax year 2012 and the result of that audit comes in in 2021 and the company has to pay a billion dollars more, that shows up on the financial statements as a billion dollars of taxes paid in 2021, but of course it has nothing to do with what the company did in 2021. So like there are just weird timing and measurement things that come in when you when you look at this. And everyone like we know that, but that is like in the popular and politician discussion that understandably gets lost.
Two is don’t necessarily assume that companies—right, cheating is I try and be careful about my language—but like companies are aggressive can be very aggressive with with how they’re playing the tax code. Amazon had a long-running case in the US tax court about how its, you know, its transactions with its entity in Luxembourg. Like there are things that are gray areas in the tax code and so sometimes companies that are paying relatively low in taxes, one of the ways they get there is by not doing things that are going to necessarily get executives sent to jail but are things that are questionable and the IRS questions them and sometimes courts decide in the IRS’s favor and sometimes courts decide in the company’s favor and sometimes they kind of settle in the middle. So, you know, it’s not—you can’t necessarily say that like a company is not paying taxes because it’s cheating, but you also can’t say that that there are no shenanigans going on because there may well be.
A lot of what’s happening is the sort of third category that you alluded to, which is the way the tax law works. Right, Congress has written the tax code to give companies certain breaks. So in Amazon’s case, there are a couple that are two that are worth talking about. One is research and development, right? The Congress has created a research and development tax credit that basically subsidizes companies’ research, private research, on the under the theory that companies that do a lot of research create sort of spillover benefits for the broader economy. You know, they’re inventing things and pushing innovation forward and that has broader public benefit, and so therefore we should subsidize it. That’s basically the argument. And so when Amazon does that kind of research, which it does all the time, it lowers its tax bill. The same thing is true in renewable energy as well. Less—I mean, they do some of that, there are other companies that obviously do more. The government subsidizes it and they pay less in taxes. It would look—right, it would look—if the government did it through a spending program, it would be economically the same, but their tax rate would be higher, right? If we created a, you know, R&D corporate subsidy program that was outside of the Internal Revenue Code, then you could have like companies paying look like they’re paying higher taxes and then getting money from government spending.
And then the second piece I’ll talk about is accelerated depreciation. And this goes into the first thing we talked about about how this looks from financial statements. Companies for tax purposes can take deduction immediately for capital expenses, things, you know, buying equipment, buying building factories, all that kind of stuff. Again, to encourage investment is the idea. So on their tax bill, they take big deductions and their profits look lower, right? So then you’re saying profitable companies are not paying any taxes. But for financial statement purposes, those costs get spread over time, and so the company doesn’t look as—that can—but it’s the other way around, right? Companies look profitable don’t look as profitable on the tax side, right? Because they have all these deductions up front, but they look profitable on the financial statement side because those deductions happen over time, over the life of the asset. Right, I have to do this normally I do this with like paper and a screen, not in my brain. So yeah, so basically you have this mismatch between when tax deductions happen and when financial statement deductions happen, and that creates the appearance that companies are not paying taxes when they are very profitable. Which is true, but you just kind of have to understand where that’s coming from. So I guess my summary of all that is like it’s a lot—it’s not—you kind of have to understand the mechanics of what’s happening to see why a particular company might have that effect, and it’s not always going to be the same thing.
The Purpose of Taxation [35:37]
Bob Zadek: And that invites an important observation about the purpose of taxation. Now, obviously, one of the purposes of taxation is to raise money, obviously. The second purpose of taxation is to influence behavior. It’s true at the personal level. Government, if they want you to behave or not to behave in a certain way, they will incentivize you—that’s a euphemism—they will incentivize you to behave in a certain way by tax policy. They don’t want you to smoke? High cigarette taxes. Don’t want you to drink liquor? High liquor taxes. They want you to buy certain stuff? You get a subsidy. They don’t want you to buy other stuff? You pay a tax. Sugared soda has a higher tax so you discourage doing it. The government wants you to have lots and lots of babies, so they give you child care tax credits. Government makes zillions of value judgments about how we should live our lives, and rather than doing it overtly by directing everybody to have 10 kids, they just reward you with tax policy with subsidizing child care and the like.
So all Amazon has done—and I don’t pick Amazon uniquely, except Amazon’s in the news more than other corporations, maybe because it’s more extreme in Amazon’s case—so all Amazon has done is the government has decided as a matter of governmental policy that we want Amazon to spend money on research and development because if they do, they make workers more productive, which means workers get to be paid more because they’re more productive. Amazon gets to improve their product, which means they lower prices and the consumers have a better buying experience. That’s good for consumers, good for the country. So the government incentivizes Amazon to do research and development. And Amazon people respond to incentives, so Amazon responds in spades to the incentive and spends buckets of money on research and development, gets rewarded with accelerated deductions on those expenses, and then Amazon gets pilloried in the press for not paying any taxes. What all it did was respond to a sensible governmental stimulus. So what government really wishes they had done is compel Amazon to spend money on research and development and not take a deduction for it on top of it. But of course government can’t do that for zillions of political and economic reasons. So now what they do is they incentivize Amazon with tax incentives and then they punish them in the media for having done so. So when you read politicians complaining that Amazon pays no taxes!!!!!, you must read between the lines and understand what is going on.
Abolishing the Corporate Income Tax? [38:59]
Bob Zadek: Now, Richard, I’d like you to speak to in the broadest sense possible whether or not in your opinion—and I don’t quite know how you’re going to answer this—as a purely tax policy, good governance, economic matter, what’s good for everybody, would the world be a better place in your opinion on those bases if there were no business income tax?
Just one more sentence, Richard, before I ask for your answer, is I have always believed that if the goal of taxation is to raise money, then and as I said earlier, when the government taxes corporations, they’re really taxing individuals selectively—shareholders and workers and consumers to some small degree as you have observed. So if you’re going to tax the individuals ultimately, just be honest about it and raise the individual income tax however you wish to do it incrementally to make up for the lost revenue and don’t tax entities at all. Because taxing entities merely means entities such as Amazon will make business decisions because of the tax benefit, not because of the economic benefit, and it distorts the use of capital. So would the world be a better place without a corporate income tax, or would it not be in a better place and why?
Richard Rubin: So I’m not going to offer an opinion on that, but let me talk about a couple considerations that might cut in the other direction, that might argue toward why one might want to keep a corporate income tax given all the arguments against it that you just laid out.
One is the foreigner piece that we talked about earlier. That like this is—it actually in a weird way—I think 40% of US equities or something are owned by foreigners, right? It’s a very big number. And so and we can’t go tax those people. Like the US has no way to say like random investor in Tokyo, “You owe us money.” But the corporate income tax operates as a way of taxing foreigners. So it’s a—it can be a useful tool for getting—for literally taxing the other guy, the guy behind the tree. So that is one argument for it.
The other is sort of a—you can end up in weird situations where if you didn’t tax corporations then the money would stay in the corporation, right? And not be distributed to shareholders and it doesn’t get to people you can tax quite as easily. And so you’re sort of—taxing the company can act as a way to get money there sooner.
It’s also in some ways like inefficient for the reasons you outlined. It also you can think of it as somewhat efficient in the sense that if we think of corporations as tax collectors, like they’re entities with that care a lot about at least at a basic level care about compliance and have a compliance infrastructure inside of them. So if you think of the corporate income tax as a corporation—if you think of corporations as tax collectors, you’d rather have, you know, the Fortune 500 as tax collectors rather than however many millions of people and then the IRS going after them individually. It’s at some level a more efficient way of taxing.
And I think, you know, it is—and then the last thing I’d say is the answer is like “compared to what?” Right? So and depends on what your aims are. If your aims are for a progressive tax system that taxes high-income and wealthy people more than lower-income and middle-income households, then the corporate income tax compared to say like raising the payroll tax or raising the 10% bracket to 12 or any other number of policy changes you could put on the other side of the ledger, the corporate income tax is going to be more progressive because of how concentrated stock ownership is. So that’s another argument for it. If you’re comparing it to say like raising the top individual income tax rate or the raising the capital gains rate or raising the estate tax or things that are even more targeted at very high-income, high-wealth households, then and your goal is progressivity, then maybe the corporate income tax is a less useful tool. So it really is about sort of what your political aims are and then with some of those administrative considerations about ease of collection, ease of compliance, taxing foreigners kind of baked into that.
Bob Zadek: Just a very brief response because we have lots more I’d like to cover, but just a very brief response to your thoughts of a second ago. As to corporations, if you don’t tax corporations, the money will stay in the corporation. Of course, in our equities marketplace that we have in America today, indeed in the world, a corporation which retains wealth but doesn’t use it to produce more wealth will be punished pretty severely. There will be raids on management, there will be hostile takeovers, shareholders will rebel. “Why are you withholding money from us and not distributing it as dividends?” And therefore we are going to punish you by selling the stock and buy stock in a company that more intelligently manages. So corporations do take extra money—I never understood the concept but I’ll use it—corporations do take extra money and use it to buy back their shares from the marketplace, which increases the price because corporations make a decision: “This wealth is better off in the hands of our owners, our shareholders, rather than in our hands.” So to some degree the market would punish that behavior.
And as to taxing foreigners, of course, if there is no corporate taxation, then the return to shareholders including foreigners would be higher, which means corporations do not have to pay as much out in dividends to keep the foreign investor happy. The money from foreigners flows in to help our domestic corporations prosper, and the money stays in the corporation.
And Richard, isn’t it now—you have made your career as studying tax policy. I’d like to go to where I started the show this morning, and that is that the whole topic of taxation is, if you subscribe to my point of view, that it is all our money, individuals’ money. And the question is, who will best use a dollar of our money to enhance our well-being? Government enhances our well-being by building roads, if they do that, by protecting us, by running the court system, running the police department, protecting our person and property, doing all of these traditional governmental functions. So government is a provider of well-being, and we have to pay for that well-being by giving them money.
But as you increase taxes, ultimately it is an individual collectively through the ballot box, an individual deciding what percentage of a dollar of my individual’s money will I get the most well-being by giving it? Should I give it—will I get more well-being by giving money to the government or more well-being giving it to business? And remember, it was business who gave us the iPhone—that increases your well-being. It was business in the form of Amazon who delivers goods even before you want them at your front door. So we get profound well-being and benefits to our health, welfare, and safety from business. So when we give money to business, we get a benefit. When we give money to government, we get a benefit. And isn’t it true as individuals examine tax policy, they are making a decision: where are they getting the most well-being for the dollar spent? Isn’t that—doesn’t that fit into the discussion a bit? Is government better to give you a dollar of well-being for the dollar, or is it private business? And isn’t that the core of tax policy?
Richard Rubin: It’s interesting you frame it that way. I you would normally think of it that way, that the taxing is sort of inextricably tied to spending the money the government raises, right? And so it’s about you think that how that it’s worth a dollar in your taxes to pay for a dollar of national defense and national parks and all the other things the federal government provides.
But now we’re in a sort of interesting moment where for a variety of reasons we’re able to economically run pretty sizable persistent budget deficits and borrow quite cheaply. And so we’re getting far—I don’t have the current math in front of me—but we’re getting far more than a dollar worth of spending for every dollar of taxing. And so that at some level—I mean in the long run it’ll all balance out eventually because we’ll just keep borrowing and eventually—actually it doesn’t. But the point is, you know, we’re getting more than a dollar of spending for each dollar of taxing. And so that at some level breaks that link between the dollar that you decide you’re willing to pay when you’re voting and the dollar that you’re, you know, consuming or getting a benefit from from government services because we’re just getting more. And that means there are other purposes of taxation too, and that I think are becoming more prevalent. Some is the redistribution that we’ve talked about, that the idea is to sort of level wealth and income a little bit through the tax system, which has always been there, but as there are budget deficits that becomes a more important or higher-ranking consideration for many.
And then the other thing is the behavioral aspect. You know, that one of the reasons we tax, you know, we tax to affect behavior, and that can be—or don’t tax to affect behavior—and that can be things like wealth accumulation, it can be things like mortgage interest, it can be things like any number of things you could talk about. So the that model that you laid out I think works, but it works not quite as well in this kind of in this moment with the persistent budget deficits where that link between taxing and spending is just more tenuous than it is at the local level and more tenuous than it used to be.
Bob Zadek: This is Bob Zadek. I spent a wonderful hour speaking with Richard Rubin, who is the US tax policy reporter for the Wall Street Journal. He writes extensively and often on tax policy. Please follow Richard’s writing at the Wall Street Journal. Tax policy will be in the news every day forever, Richard, so keep your pen and computer handy. And if you’ve enjoyed this podcast and this live broadcast, please so indicate on your podcast provider. Tell us what you like and what you don’t like. We appreciate all of your comments. If you have a topic you’d like us to discuss, we’ll be happy to respond and satisfy your every intellectual need. So thank you so much for listening this Sunday morning. Thanks again to Richard Rubin for providing us with such objective, solid information. Bob Zadek saying so long for now. I’ll be back next Sunday. Have a good balance of the weekend.