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Ending the Corporate Tax

February 26, 2013 in Economics

By Richard W. Rahn

Richard W. Rahn

Can you name the worst tax? In recent weeks, there have been a slew of articles in major publications about how many multinational corporations have found legal ways to reduce their tax burdens by running some of their operations through low-tax jurisdictions. Many who love high taxes and big government demand that corporations pay more.

Economists dislike the corporate income tax because it reduces productive labor and capital and is an additional tax on income that has already been (or will be) taxed. Politicians love the tax because it is largely invisible to most voters. Because of tax competition among countries, corporate tax rates have been dropping globally, resulting in the United States having the world’s highest rate.

Now the high-taxers are fighting back. Liberal senators such as Bernard Sanders of Vermont have introduced proposals to make it more difficult for corporations to engage in legal tax minimization strategies. The Paris-based Organization for Economic Cooperation and Development has released a paper explicitly arguing for more international harmonization of the corporate tax base, which would make it easier for countries to tax corporations worldwide. The organization’s bureaucrats, who enjoy tax-free salaries, of course, forgot to ask the basic question of whether the corporate tax is beneficial or destructive.

To answer that question, one would need to know who actually pays the corporate tax, what the economic effects of the corporate tax are, and whether the benefits of leaving the money with the corporations to spend exceed the benefits of enabling the politicians to spend it.

Taking money from business benefits only big government.”

Who pays the corporate tax? A corporation is only a legal means by which to do business. Taxes may be levied upon it, but only people pay taxes. Thus there always has been much debate about who pays the corporate tax. Is it passed on to customers in higher prices? Is it passed on to workers in the form of lower wages? Or is it passed on to the stockholders in the form of lower dividends and capital gains? One can find studies to support differing combinations of each of the above, depending on the methodology and assumptions made and sometimes based on the ideology of the author.

The truth is that the burden of the tax varies by industry. Those who argue that the final customer does not bear the burden note that many goods and services can …read more
Source: OP-EDS

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