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Friday, October 28, 2016

With President Barack Obama and leaders in both parties favoring lower corporate tax rates, Washington seems poised to enact change next year. They need only resolve details like how much the rates should be cut, which tax avoidance strategies should be barred and whether to give manufactures a discounted rate.

If the corporate tax rate is cut, should the rates for dividends and long-term capital gains be increased?

That issue was inadvertently put on the table by a leading free market organization, the American Enterprise Institute. The AEI, as part of its support for cutting the corporate tax, promoted the idea last month that workers, not investors, bear the burden of that tax. In taking that line, however, the AEI has undercut its own argument for tax relief for investors. Indeed, it shifts the debate toward higher taxes on capital gains and dividends and lower taxes on wages.

We’ll follow that logic later. But first, who bears the burden of the corporate tax? Is it the owners of a corporation, through a lower return on their investments, or is it workers, through lower wages? This question is endlessly debated by economists.

Many people assume corporations just pass the corporate tax on to consumers through higher prices. This is true for monopolies, such as corporate-owned electric utilities, whose prices are set by governments. But it is not true in a competitive market.

The idea that owners bear the tax burden took hold after economist Arnold Harberger wrote a 1962 paper that quickly became a classic of tax economics. I studied his work in more than one economics course in the late 1960s and into the mid-1970s.

When that paper was written, the United States dominated industrial production, the legacy of the devastation of World War Two on the economies of Japan and Europe. As global manufacturing increased, Harberger, who taught at the University of Chicago, refined his theory. In later works, Harberger wrote that while the corporate tax burden falls on owners in a closed economy, in a global economy, where capital flows freely, the burden shifts toward workers, who cannot move so easily.

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Copyright 2012 The National Memo
  • Howz 1

    We are in a global competitive market place where corporations have no loyality to one country or another, only the share holders. A good example is Halaburton that made upwards of 6 billion a year from the Iraq war( Cheney’s company)but decided they could avoid paying any of that in taxes to the USA, and promply after the end of Bush2 jumped ship for Dubai. So a larger question emerges as to what loyalty we should show them. We can’t just lower the rate as another gimmie to the 1%, they have enough. We have to tie it to the creation of more good jobs here. We also need to create a punishment for any company like Cisco, which is now an Irish company,and say choses not to return after we lower the rate because the Irish one is still lower. I think it is more sellable if we say that we will tax every job that a former American company relocates out of the country from that companies profits here, and tax them on their assets here even though the company might have corporate offices somewhere else. If they refuse to pay ask them to remove their entire operation from the US. For example if Cisco was forced to pull out all operations, than other companies would immediately fill the void and employment would stay the same.
    Then I think it would create more bi partisan buy in.

  • concernedusa7

    Thanks David for some enlightenment, if only we could enlighten the REPUBLICAN 29%!