Kill the Corporate Tax to Help Workers

Jettisoning it would increase wages and shrink the tax loopholes lobbyists can win for their clients.

by Quin Hillyer

Source: National Review Online

It was a former top Democratic staffer on the House Budget Committee, not some Kemp-Laffer supply-sider, who first convinced me that one of the most dynamic and worthwhile tax reforms, and one of the least costly (to the federal government’s revenues), would be the complete elimination of the corporate income tax. Now comes Laurence Kotlikoff, a well-respected economist, usually a critic of the Lafferites and the tea partiers, to urge again — in the New York Times, no less — that we jettison the whole corporate income tax.

Kotlikoff is right: The corporate income tax is a drain on our economy and a horribly inefficient way for the government to raise money. It should be repealed as soon as possible. In his January 5 op-ed in the Times, Kotlikoff writes:

I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot. . . . It’s been a long time since the typical American worker received a raise in her real pay. In fact, average weekly earnings, exclusive of fringe benefits but adjusted for inflation, are 10 percent lower today than they were in 1966. This is America’s nightmare, not its dream. Turning things around requires getting a lot of things right, starting, I’d argue, with corporate tax reform.

In a much longer academic paper on the subject, Kotlikoff explained why it is employees, not business owners, who stand to gain the most from eliminating this tax:

The reason is simple. Workers living in a country are generally immobile, i.e., they rarely seek employment abroad. On the other hand, capital that is invested domestically can be withdrawn and invested in other countries. When this capital flight occurs, the workers and their jobs are left behind, leading to lower labor demand and real wages for those able to retain their positions.

(Actually, this is much like the argument former U.S. senator Rick Santorum made during his presidential race, although he complicated the proposal by suggesting we eliminate the tax only for manufacturers while cutting it in half, to 17.5 percent, for everybody else. Santorum at least recognized that such a proposal could be used to attract blue-collar voters, a constituency Republicans have been losing.)

Kotlikoff, working with colleagues from the nonpartisan Tax Analysis Center, has devised “a large-scale computer simulation model of the United States economy as it interacts over time with other nations’ economies.” In this model, when the U.S. corporate income tax is eliminated, “real wages of unskilled workers end up 12 percent higher, and those of skilled workers end up 13 percent higher.”

Meanwhile, even while explicitly rejecting any “extreme supply-side (aka, voodoo economics) assumptions,” Kotlikoff, in his academic paper, projects (exactly as I did back in 2006) that expansion of “existing tax bases” would make his proposal “self-financing to a significant extent” — making up for “roughly one-third the loss in revenue from the corporate tax’s elimination.”

Kotlikoff proposes other tax hikes to make his proposal fully “revenue neutral,” but conservatives need not accept that entire straitjacket (apart, perhaps, from tinkering with some personal deductions and working out some kinks with “S” corporations and limited partnerships that arise when the regular corporate tax goes away). Because the influx of repatriated earnings alone will produce (in Kotlikoff’s words) “rapid and dramatic increases in American investment, output and real wages,” conservatives who believe in what Kemp called the “animal spirits” of the free market need not sweat the projections to every last dollar. Combined with a few smaller revenue raisers, we can sell this reform to the working voters it will help with every confidence that it won’t much exacerbate the gaping long-term budget hole against which Kotlikoff, as much as anyone else, has long warned us.

Moreover, as Megan McArdle has noted, eliminating this tax would also eliminate all the time, effort, and money that companies spend on “tax avoidance.” This also would level the playing field some for smaller businesses that can’t afford the lawyers and pricey accountants to devise tax-avoidance strategies that give large corporations a huge competitive advantage.

Finally, McArdle and I both have argued that getting rid of the corporate income tax would have the happy effect of reforming how lobbyists function, because probably half of D.C. lobbying involves not appropriations or regulatory matters but the tax code. And the tax code’s complexity makes that sort of lobbying more susceptible than others to legal and ethical shenanigans, because the ways to “game the system” on tax loopholes, without being caught, are more numerous.

Let’s give Kotlikoff the last word. By phone on January 10, he said: “We need a tax system designed by economists, not politicians, so it will be simpler, fairer, more efficient, and will ensure our children’s future.”