It’s election season, so politicians are naturally going to spout off some pretty weird proposals. Given what voters believe, it’s not possible for every proposal to be useful and still appeal to us for our votes. However, Joe Biden’s tax proposals manage to be wrong in both theory and practice, which is pretty good going even by the low standards of politics.
The specific points that catch my eye (among the deep well of giveaways for favored constituencies, including carbon capture, child tax credits, and all the rest) are about corporate and capital income taxation. The theoretically wrong proposal is that the corporate income tax should rise. This is on the grounds that corporations should be paying in to support the country that supports them.
The thing is, companies don’t pay taxes. All taxes make the pocketbook of some live human lighter. There’s no one here but us to pay taxes — the dolphins aren’t coughing up for Medicare and the trees don’t pay for the Pentagon now, do they? We can tax, in name, groups of people like a corporation, but it is only in name. We’re still taxing people in the end.
So, the idea that “corporations” must pay tax is silly just because they don’t and can’t pay taxes — we’re taxing some group of people instead.
This leads into where the tax plans are wrong in practice. The insistence is that taxes on dividends and capital gains to higher-income people (over $1 million a year) will change to the new higher income tax rate, 39.6%. But to tax those two types of income the same as normal income, we have to reduce the dividend and capital gains tax rates. Remember, we’ve just taxed the profit of the company at the new higher corporate income tax rate of 28%. But it’s not the company paying this because it cannot be — it’s that group of people, the investors, who are being taxed that. Profits belong to investors and so, in the first pass, taxes on profits are paid by investors. Now, when some of that already taxed profit is paid to investors, we tax it again at 39.6%? How is this the same as income tax rates? Nope, we can’t say the company is taxed and then the people. It just doesn’t work that way. Both taxes are being paid by the investors.
Much the same is true of capital gains taxes. The value of a stock or other investment is lower by the amount of tax the corporation or investment has to pay directly. So we’ve already taxed it once and now we tax it again? If that’s so, then we need to tax it at a lower rate to get to the normal income tax rate.
All of which is why there is currently that 15% income tax rate for dividends and a lower capital gains tax rate — we already gave at the office.
Well, that’s only part of it actually, for we can return to theory again. One of my countrymen, Sir James Mirrlees, got the Nobel for his study of tax systems. One result of this optimal tax theory is that making the country as rich as it can be means taxing incomes from capital (those profits, dividends, and capital gains) at lower rates than other incomes. It was actually Joseph Stiglitz (yes, him, back when he was doing economics rather than politics) who went further and pointed out that sometimes this could mean a negative tax on incomes from returns to capital. No, not because that would be just, or righteous, or to please the plutocrats, but because that’s what makes, over time, the average working stiff richer.
Making America richer means lowering the taxes upon corporations and the returns to capital. Even taxing at the same rate as income means lower rates than Joe Biden is suggesting. But, you know, election season. We can expect good sense to return on Nov. 4.
Maybe.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
