John Endean raised an intriguing idea the other day in response to my blog on whether business executives would be willing to give up targeted tax breaks in return for a lower corporate rate, as John McCain has suggested.
John, who is president of the American Business Conference, said that one of his CEO members has a different swap in mind: Completely repeal the “terrible” corporate income tax and pay for it by raising rates on top-bracket taxpayers. In effect, this would directly tax the owners of capital rather than doing so through the backdoor of the corporate tax.
John wrote:
What to do about the lost revenues if that happy day ever comes? One CEO in my association recommends "paying" for abolition by raising the marginal tax rates on the income of wealthy taxpayers. This approach at least has the advantage of reminding everyone that the corporate tax is paid by people even if incidence theory suggests that the tax falls on poorer, rather than richer, Americans.
Well, I asked TPC’s Jeff Rohaly to run this idea through the Big Computer to see what would happen. The results were fascinating. It turns out that if you want to finance complete repeal of the corporate tax, you’d need to boost the top three individual rates to an eye-popping 50.1 percent, 59.1 percent, and 62.7 percent, and raise the tax on capital gains and dividends to about 27 percent. If you leave the rates on gains and dividends untouched, taxes on ordinary income would have to double to 56 percent, 66 percent and 70 percent.
This is a rough and ready static analysis, so it doesn’t take into account changes in taxpayer behavior. In reality, it would probably drive rates even higher since such a shift would create huge opportunities to shelter income.
The problem is that even though the corporate tax is hugely inefficient and riddled with loopholes, it still will take in about $360 billion this year. Making up that kind of money is not easy, it turns out.
Economists disagree over how much corporate tax ends up being paid by owners of capital and how much is paid by workers, but, as John suggests, it is not a bad idea to try to find a way to make this tax explicit.
A better choice would be to fully integrate the corporate and individual tax so all profits are taxed just once. Many broad reform plans try to tackle this and the idea does not seem that far from what John's CEO likes.
Unfortunately, simply repealing the corporate tax and dumping the cost on high-income taxpayers would induce both serious sticker-shock and egregious sheltering. Something to keep in mind the next time someone breezily suggests repealing the corporate tax.
