The tax on corporate profits is a terrible tax. Economists to this day don’t know who pays it. And that means that we really don’t know who’s bearing the burden.
Daniel Altman: The United States has one of the most complex tax systems in the world. It takes hours and hours to fill out the return for most people. Especially if you want to claim any deductions or if you have more than one source of income, you got to file your state taxes separately. Maybe even local taxes depending on where you live. It's a nightmare.
There's no doubt we can do a lot to simplify our tax system. But we could also do a lot of other things to change it too. And the fact is we haven't really made a major change in out tax system for about a hundred years. It's been a hundred years since we got a constitutional amendment just so we can have an income tax. Now maybe it's time to consider how we would refit our tax system for the 21st century.
One thing we could do is get rid of the corporate income tax. That's right, the tax on corporate profits. Why? It's a terrible tax. Economists to this day don't know who pays it. Is it the people who own shares in companies? Is it employees of companies? Is it consumers who buy the products from companies? We don't know. It could be a mix of all of them. And that means that we really don't know who's bearing the burden.
Another problem with the corporate income tax is it's extremely volatile. Unlike your household where you pay taxes no matter what. Whether or not you spent all your income or not. When a company spends all its income, it has no profits and it doesn't pay any corporate income tax. So that means the corporate income tax revenue is really volatile.
In years when the economy is doing great we collect a lot of corporate income tax revenue. When it's doing badly we collect much less. And that means it's much harder for the government to plan. It's much harder for us to make sure that we get a steady stream of revenue from year to year and we don't have to cut back on spending during a down turn.
So what could we do to replace it? Well one idea would be to change our income tax into a sort of hybrid income and wealth tax. So we would still be taxing some of the owners of capital in this country and not just people who own labor and supply that into the work force. How would it work? Well, we would have a sliding scale where, depending on your wealth, you would pay different rates of income tax. If you didn't have any income coming off your wealth then you wouldn't pay any tax. But the more wealth you had, the higher tax rate you'd be liable to pay.
The great thing about this is if you hold income constant, then you're always facing the same marginal tax rate, that's tax rate on the next dollar of your wealth. If you hold wealth constant it's always the same marginal tax rate on your income. So that distortions on the behavior that we might have and where we invest and how we work are minimized.
Now is this too crazy an idea to be implemented in the 21st century? Some people might even say it's unconstitutional. But it's at least worth thinking about it because we've done so little to change the fundamentals of our tax system for a century. All we've been doing is messing with these little details that just add more lines to the tax form. Lets do something major and clean it up for the next century.
Jonathan Fowler & Elizabeth Rodd