Should we get rid of corporation tax? (Part 1)

It’s famously difficult to get a group of economists to agree about anything. Lock a left and right wing economist in a room and ask them to come up with the best method of taxation, or the most effective way to grow the economy, and you’d die of old age before they ever reached a consensus.

There are, however, exceptions to the rule – and one of them is corporation tax. An area of taxation which you might think would have economists of the left and right in their default ‘at each other’s throats’ position, actually finds them in chummy agreement. As this episode of NPR’s Planet Money demonstrates (they quite literally sat a bunch of left and right wing economists in a room and tried to find something they agreed on); mainstream economic thinking basically says that taxing corporate incomes is silly, and that we should stop doing it.

This is interesting because, if you tried, I doubt you could find a view that was more directly opposed to that of the general public. In the UK, the US (and, one would imagine, pretty much everywhere they have corporations) most people seem to think that corporations should be paying more tax, not less. Certainly not no tax. And, on the face of it, this seems pretty sensible. ‘Corporations’, in most people’s minds, are synonymous with big profits and rich businessmen. Why not take some of that money back for the public pot?

But when the popular view flatly contradicts that of most experts, I’m sorry to say I tend to bet on the experts. Especially when it comes to matters of fact rather than morality. And this is a matter of fact. It’s not about whether it’s morally right to tax corporate income, but about whether it works to do the things we want it to do. And, sure enough, it seems like the economists have the upper hand in this argument.

The main point economists make (see here for a good example) is that, in the end, taxes are paid by people. Any corporate income that gets taxed away is money that, if the tax didn’t exist, would have gone into somebody’s pockets. The question is whose. And the answer is…we don’t really know. Some of it comes from company shareholders (not all of whom will be rich investors; some will be pension funds and so on), some from workers in the form of lower wages, and some from consumers in the form of higher prices for goods. Taxing workers and consumers is not really what I imagine most people have in mind when they say they want higher taxes on corporations. What they really want is money from the people who get rich from corporations – CEO’s, rich shareholders and the like. But why use a tax on corporate incomes, accidentally catching a lot of other people in the net in the process, when you could just tax them directly through, for example, higher dividend and capital gains taxes?

This point is pretty well fatal for the main popular argument in favour of corporation taxes. If we replaced the tax on corporate incomes with an increase in the top rate of tax, along with higher taxes on dividends and capital gains, almost all of us would be better off. The only people who would be worse off are the highly paid corporate executives and rich investors. I for one would be OK with that.

One more argument you sometimes here in favour of corporation tax is that it functions as a charge for the costs corporations impose on society as a whole (in economics these are called ‘negative externalities’). Pollution is a good example of this. In the course of doing business, a corporation might generate a certain amount of pollution. However, the corporation doesn’t pay for any damage this might cause — we as a society have to. By imposing a corporation tax, we can recoup the money we need to deal with these negative externalities. The problem with this is that it’s not a good argument for taxing corporate profits in general. Why not instead charge each company for the actual pollution they produce? This would have the added benefit of creating a financial reason not to pollute.

That’s two of the most important things you would want a tax on corporations to do (tax rich people, and deter or compensate for ‘negative externalities’); both of which could be done better by other means. And that’s before we talk about the laundry list of other problems corporation tax causes; including making it more difficult to start a business, and making it so that the companies that survive are the ones who are best at ‘tax management’ rather than the ones that make the best stuff (see here, and here for summaries).

…and that’s where most articles I’ve read on the subject have left it. Leaving you with absolutely no idea why so many countries (most of them in fact) carry on with such a transparently stupid policy. Unfortunately it turns out to be a bit more complicated than that. So in the next post I’m going to try and explain why the corporate income tax might not be such a bad idea after all. 

About Robert de Vries

I'm an Early Career Research Fellow in the Sociology department at the University of Oxford. I'm mainly interested in how people are affected by concerns about their social status; how it colours the way they think, feel, and behave. I try and contribute here regularly, but my addiction to writing excessively long posts keeps getting in the way.
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