No one is ever going to like every detail of a new tax bill – there will always be those insistent that other people should be taxed more, just as there will be those who are just as emphatic about how they themselves should be taxed less. Such is the problem of plucking the public goose of the feathers with the least amount of hissing. However, it is possible to have complaints that are foolish. Like this one:
US business shows little sign of needing the hefty tax cut that congressional Republicans are rushing to enact into law, according to several analysts. Big business already is posting record profits while paying less than half the share of Washington's bills that it paid a half century ago.
That’s David Lynch of the Washington Post but this view is common — I’ve seen the likes of Sen. Elizabeth Warren, D-Mass., lay it out more than once.
My response to the first sentence is that need isn’t the determinant of who gets taxed nor how much. What we’re interested in is the effects of such taxation. Something which here, with corporate taxation, produces never-ending screaming matches.
It’s the second observation which is foolish, because the correct response to it, for anyone who has any knowledge at all of the economy, is “Well, Duh!” And if our correct reaction to your complaint is that we sound like Homer Simpson, you really might want to go and have a look at your basic contention, no?
Timothy Taylor has laid out what has happened in detail a couple of times. It’s really very simple. Roughly 50 percent of American business has moved from paying the corporate income tax to paying the personal income tax over those decades. Therefore, the portion of Uncle Sam’s expenses met by the corporate income tax has fallen by about that 50 percent.
And that’s it. It’s that simple.
It has nothing at all to do with tax breaks for business, any lowering of corporate income tax rates, special deals, loopholes, or anything like that at all. We’ve just changed the name of the tax being collected, that’s all.
In more detail, there are essentially two ways that business income (so, profits and so on) is taxed. A C-corporation pays the corporate income tax. An S-corporation (plus a partnership, LLC, or a sole proprietor) pays the individual income tax. Instead of charging a special tax to that second set of business organizations, we just go to the people who own it, assume the profits are their personal income, then charge them normal and regular income tax. Only a C-corporation pays the corporate income tax.
At which point, we can note that corporate profits are at a high (they are, although not as high as some think, overseas profits are a different ball game) so why aren’t tax revenues on corporate profits at an all-time high?
About 50 percent of the economy has moved from being C-corporations over to S-corporations and those other business types over these decades. No, really: Half of the entire economy has changed business types. We do, generally, think this is a good idea too. It’s easier to collect taxes this way, it produces fewer distortions in the economy, we know that we’re actually taxing the richer people, not the poor pensioner collecting dividends, and so on. It’s pretty much a bipartisan consensus here(and the economic wonks are all in favor too), that where we can, we should be taxing the individual incomes, using the corporate income tax only where we must.
You can, if you wish, disagree with that consensus that we should be taxing this way. Why not? I disagree with many general consensuses out there too.
But it simply isn’t true that we have lightened up on taxing corporations at all. We’ve just changed the name of the tax we charge to business profits. And yes, it really has been as large a change as half the entire U.S. economy. Which is why the result is a halving of the corporate income tax as a portion of the economy and as a portion of Uncle Sam’s revenues.
The end result of this being that whenever someone starts yammering on about how corporate income tax collections are half what they used to be you can assume they are ignorant, lying, or doing politics – but then I repeat myself triply.
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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