Why I Still Think We Should Eliminate the Corporate Income Tax

By Megan McArdle

One of the first blog posts I ever wrote was on why we should eliminate the corporate income tax. This is not because I just looooooooove corporations, or wish to put more money into the hands of rich people--on the contrary, I want to pair an elimination of the tax with an end to the special low tax rates for dividends and capital gains, and maybe even an increase in rates for higher brackets if that's necessary to keep the thing revenue neutral. Which would actually be considerably more progressive than the current system.

Rather, I think the thing's horribly inefficient--companies and rich people spend an exorbitant amount of time arranging their affairs to be lower-taxed, rather than more productive. Taxing capital once, when it hits a person, as ordinary income, would in one fell swoop eliminate most of the tax-avoidance activity that goes on in this country. It's also not necessarily as progressive as its proponents think, and well, you can read all my other reasons for disliking it here.

This is not necessarily politically realistic, of course, which is a fair criticism of the plan. But sometimes, I like to argue for first-best policy, even if it's a no-hoper.

However, Peter Coy, the economics editor of BusinessWeek, thinks I'm wrong. He argues that eliminating the corporate income tax isn't first-best policy, not even close. He channels Reuven Avi-Yonah, a law professor at Michigan, to argue that the corporate income tax is necessary to rein in the power of corporate managers. He quotes William Howard Taft:

While the faculty of assuming a corporate form has been of the utmost utility in the business world, it is also true that substantially all of the abuses and all of the evils which have aroused the public to the necessity of reform were made possible by the use of this very faculty. If now, by a perfectly legitimate and effective system of taxation, we are incidentally able to possess the Government and the stockholders and the public of the knowledge of the real business transactions and the gains and profits of every corporation in the country, we have made a long step toward that supervisory control of corporations which may prevent a further abuse of power.

It's an intriguing argument, but I'm not convinced. Taft wrote those lines long before the rise of the modern regulatory state; these days, corporations have all sorts of regulators sitting on top of them and monitoring their transactions, including the SEC. In the early 20th century, maybe corporations were a black box. These days, the CEO can't sneeze before filing a regulatory report--and while, yes, I'm certainly in favor of dramatically simplifying regulations, that doesn't mean I want to get rid of things like anti-pollution laws or bank capital requirements. I feel like we have all sorts of vehicles for "supervisory control of corporations", and the IRS is probably not the most efficient.

Moreover, it's far from clear to me that the taxing power has ever been very good at reining in the power of corporate executives. Was the head of GM less powerful in 1955 than in 2008?

Hardly. Corporate power is derived only weakly from profits, which is what we tax. It is much more strongly derived from the role of corporate executives as employers, as buyers of products from other people and firms, and their role as sellers to businesses or consumers. Would Steve Jobs, or any of his managers, have been noticeably more powerful if Apples' cash hoard was twice as large?

The transactions that generate most corporate power are not only untaxed--they actually reduce the corporate tax bill. I'm not arguing that the corporate income tax increases corporate power. But I think that this argument is probably about as plausible as the inverse.

If we really hate corporate power, we'd probably want to look at the things that entrench it--like heavy regulatory burdens that are more easily borne by large, powerful companies. But this is not an argument that ever gets much traction outside of some economists, and the libertarian community. Which makes me think that the corporate income tax is largely expressive--we like policies which penalize corporations, particularly big ones, regardless of their actual effect on corporate power.

http://www.theatlantic.com/business/archive/2012/02/why-i-still-think-we-should-eliminate-the-corporate-income-tax/253673/