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Tax Policy

7 min read

Part of Taxes, spending and debt.

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Every episode (7)

Who argued it

William Ruger · Jason Sorens · Chris Edwards · Richard Rubin · Edward Conard · David Lesperance · Sarah Skwire · Steve Horwitz · Travis Brown

National Debt · Economic Growth · Welfare State · Immigration · Labor Markets

Background: Income Tax

The personal income tax and the price of work

In a discussion of migration between states, the guest describes California’s personal income tax rate as having been 10.3% and recently raised to 13.3%, which he calls the highest in the country, against a zero income tax in Texas. He frames the difference through two graduates choosing to return home, one to California and one to Texas, saying the gap between a zero rate and a rate as high as 13.3 can make a huge difference to a lifetime’s earning potential — lowering student debt for those starting out, or determining when they can afford a first down payment on a mortgage. He reports meeting people on a national book tour who say that staying in or moving to a zero income tax state changed their family’s life because they could pay college tuition with the money saved. Where is Everyone Going? (2013)

The same guest states that the nine states with zero income tax have collectively gained over $146 billion over a 15-year period, while the nine states with the highest personal income tax rate collectively lost over $100 billion. He cites Texas as a state where labor participation keeps increasing and where jobs over the past three to five years have been better than almost anywhere else in the country, concluding that when government gets out of the way of work, Americans will work more. Where is Everyone Going? (2013)

The corporate income tax as a tax on people

Bob Zadek introduces the corporate income tax as a job-killing statute that an economist writing in the New York Times proposed eliminating in response to poor unemployment numbers. Zadek argues that corporations cannot pay taxes: they write checks, but the expense is built into the sales price of the product, into how much wages they can afford to pay workers, and into dividends paid to owners, so the cost is spread to workers, suppliers, creditors and owners, all ultimately humans. A decision to tax a corporation, he says, is a decision to tax owners, workers, suppliers and creditors, but not to tax the corporation. How the Free Market Will Save the Planet (2014)

Zadek adds that the corporate income tax survives because it is a home for cronyism: corporations seek special tax bills from Congress, and voters rarely learn when a corporation is given a tax benefit. He invokes the economics concept of concentrated benefits and dispersed costs, illustrating it with a corporation realizing a $10 million benefit from a special tax break while the cost to each individual is four cents, so no one storms the Bastille over four cents while the corporation lobbies hard for the benefit. He also cites the principle that an old tax is a good tax, because people have adjusted to it and inertia diminishes the likelihood of change. How the Free Market Will Save the Planet (2014)

Incidence and the case for abolition

In a later episode, Zadek asks Richard Rubin to explain the concept that corporations do not pay taxes but are tax-collecting intermediaries. Rubin agrees, describing corporations as collections of shareholders, bondholders, employees, executives and to some extent customers, and the corporate income tax as a tax on a business’s profits. He says economists disagree about where the burden lands but group the answers into capital and labor: shareholders are burdened because shares are worth less and the company can return less in dividends, while in the long run companies may pay workers less because lower after-tax returns mean less investment, so machines do not make workers more productive and wages cannot rise as much. Government estimates put roughly three-quarters of the burden on capital and one-quarter on labor, with more conservative economists saying it is closer to even. Auditing the Corporate Income Tax (2021)

Rubin notes that shareholders tend to be wealthier and higher income than the population as a whole, but that stock ownership is also widely distributed through 401(k)s, and that a big portion of corporate shareholders are foreigners — he says something like 40% of US equities are owned by foreigners — so the corporate income tax operates as a way of taxing foreigners. He compares it to the car rental tax in Orlando, where local government captures some of the high demand. Auditing the Corporate Income Tax (2021)

Asked whether the world would be better without a business income tax, Rubin declines to offer an opinion but lists considerations cutting the other way: the foreigner piece, the fact that without the tax money would stay in the corporation and not reach people who can be taxed easily, the compliance infrastructure of large corporations as tax collectors, and the progressivity of the corporate income tax relative to raising the payroll tax or the 10% bracket, though less targeted than raising the top individual rate, the capital gains rate or the estate tax. Zadek responds that in America’s equities marketplace a corporation that retains wealth without using it to produce more wealth will be punished by raids on management, hostile takeovers and shareholder rebellion, and that corporations buy back shares because they decide the wealth is better off with shareholders. Auditing the Corporate Income Tax (2021)

The income tax as punishment

In a 2023 episode, Zadek says the “tax the rich” concept implies something inherently improper about wealth itself, naming Elizabeth Warren, AOC and Bernie Sanders as people who abhor the very concept that there are rich people, and calling the income tax the tool by which successful people get punished. He invites the audience to imagine the country without an income tax, noting that the country had a period of great economic growth after the Civil War and until the income tax, and in the first few years after the income tax, and that it managed sustained growth, a better standard of living and longer life expectancy without an income tax. What the IRS’s Hiring Spree Means for You (2023)

Zadek states the core principle that the more you tax something, the less you have of it, so the more income is taxed, the less income is produced, and asks where the money to hire people comes from — it comes out of earnings. He compares taxing the activity of earning money to taxing breathing and making people cut their breathing in half. He notes the Biden administration allocating $80-plus billion to the Internal Revenue Service and calls the IRS the only federal agency whose goal is taking property from people who did nothing wrong, contrasting it with sales tax, which is paid voluntarily and does not make him resent the restaurant. What the IRS’s Hiring Spree Means for You (2023)

Across episodes

The 2013 episode treats the personal income tax through state migration and the price of work, and the 2023 episode treats the income tax as punishment and the IRS as its collector. The later treatment is more equivocal than the earlier one, with the guest supplying counterarguments the host does not adopt.

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