Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Understanding corporate tax philosophy

Posted by sanityinjection on May 12, 2009

From time to time I’ve posted a few links to columns by economist John Tamny. What I like about Tamny is that he has a nice ability to explain some fairly complicated issues in a way that is easy for us laymen to understand, without gross oversimplifications or descending into propaganda. While I don’t always agree with everything he says, I think he does a good job of laying out the issue in a way that helps the reader form his or her own conclusions.

Here is Tamny’s latest piece discussing federal policy on corporate taxation:

http://www.realclearmarkets.com/articles/2009/05/the_mythology_surrounding_the.html

The one thing Tamny leaves out, which I think is worth reiterating, is that in this era of globalization, it is all too easy for corporations to leave a country with a high corporate tax rate and head for one with a lower rate. Thus, even if one thinks that a high US corporate tax is fair and wise, it will do little good if there are no corporations left to pay it.

We find a good analogy for this in the film industry. Many US states have implemented, or are considering implementing, special tax breaks for television and movie producers who film in those states. Not because the film industry is somehow more virtuous than any other, but because film shoots are engines of economic activity, especially at the local level. In doing so, these states hope to attract film shoots that would otherwise have benefited some other state. And the evidence seems to suggest that the strategy works.

Similarly, why should the US not make itself an attractive location for corporations (and all the jobs that come with them) by creating a tax incentive? Not through the loopholes that exist currently, but (as Tamny suggests) by combining elimination of the loopholes (which the Democrats want) with a general lowering of the overall rate (which the Republicans want). Something for everyone.

There are two basic arguments that get made in opposition to this approach. They are usually couched in much more elaborate language, but what they boil down to is 1) Evil corporations are evil and should be punished, or 2) The federal government cannot afford the lost revenue if the corporate tax rate is lowered.

The first argument does not deserve much effort in the way of rebuttal, although you would be surprised at the number of otherwise intelligent people that espouse it. The second argument is a much more sensible one, but it rests on the assumption that lowering the corporate tax rate would in fact decrease tax revenue. In fact, supply-side economics assumes to the contrary that lowering the tax rate would generate enough additional economic activity to offset any loss in revenue, or possibly even result in a net revenue increase.

Of course, this is the same debate that pertains to tax policy generally, and which side you come down on tends to have a lot to do with your political philosophy. Economists aren’t much help as they come in both flavors just like the rest of us. I think there is sufficient evidence to suggest that lowering taxes can be done without significantly reducing revenues, but I do acknowledge that may not always be the case. With regard to corporate taxes, however, it would seem that the risk of doing nothing, and seeing more capital and jobs leave the country, is greater than the risk of doing nothing.

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One Response to “Understanding corporate tax philosophy”

  1. sanityinjection said

    And here is the WashPost’s Robert Samuelson making a slightly different argument for lowering the overall corporate tax rate:

    http://www.realclearpolitics.com/articles/2009/05/11/the_great_tax_dodge_demystified_96433.html

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