Corporate vs Personal Income Taxes

The Sunday NYTimes has an interesting commentary from Harvard prof Greg Mankiw on Corporate taxes:

Compared with other ways of funding the government, the corporate
tax is particularly hard on economic growth. A C.B.O. report in 2005
concluded that the “distortions that the corporate income tax induces
are large compared with the revenues that the tax generates.” Reducing
these distortions would lead to better-paying jobs.

Of course, a corporate tax cut would affect the federal budget.
And any change in tax policy has to be made against a background of a
looming fiscal crisis, which threatens to unfold as baby boomers retire
and start collecting Social Security and Medicare.
In 2007, corporate taxes brought in $370 billion, representing 14
percent of federal revenue. Cutting the rate to 25 percent would seem
to cost the Treasury about $100 billion a year.

Part of that
revenue loss, however, would be recouped through other taxes. To the
extent that shareholders would benefit, they would pay higher taxes on
dividends, capital gains and withdrawals from their retirement
accounts. To the extent that workers would benefit, they would pay
higher payroll and income taxes. Increased economic growth would tend
to raise tax revenue from all sources.

Mankiw suggests dropping the corporate tax rate, and making up the revenue short fall with a Pigou tax of 40 cents a gallon on gasoline. That has precisely zero chance of passing.

To give it some context, consider this excellent chart assembled by Time’s Justin Fox:



Justin adds some caveats:

-Corporate income is taxed
twice — once as corporate income and once as either capital gains or
dividend income (which are both counted under personal taxes)

-Economists teach that corporations are often able to pass on much of their tax burden
to employees and/or customers.

-Relatively high
corporate tax rates incentivize corporations to find ways to run their profits through lower-tax

-Corporations are just legal constructs owned
and operated by people who, for the most part, pay taxes.


A chart for the corporation-bashers among you
Justin Fox
Time, May 21, 2008 9:09

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