As the fiscal cliff looms ahead of us, the R Street Institute has just come out with a “A TAX HIT LIST FOR THE 113TH CONGRESS” (PDF) naming three taxes that we should kill. Namely, they’re looking at the Corporate Income Tax, the Estate Tax, and tariffs.
From the report, on corporate income taxes:
While the corporate income tax is politically popular and has strong populist appeal, many economists have called it into question. For example, conservatives such as American Enterprise Institute economist Kevin Hassett and liberals like former Obama advisor Austan Goolsbee have studied the deadweight losses and other distortions imposed by the tax. As a result, policy analysts from across the political spectrum believe that it simply shouldn’t exist. It generates an enormous amount of economic dislocation relative to the revenue it raises, while encouraging myriad behaviors that do little or nothing to promote economic growth in the name of legal tax avoidance. Meanwhile, the potential benefits of eliminating it are substantial.
Though obscured by their structure, corporate income taxes are just another form of individual taxation. Every dollar of corporate income tax is ultimately paid by one of three groups of people: employees, customers, or shareholders. Because corporations pass all costs on to these groups, corporate income taxes inevitably lead to some combination of lower wages, higher prices, and lower returns for investors.
Economic literature on this matter is complicated, but some studies suggest that as much as three of every four dollars in corporate income tax costs are borne by a firm’s workers, most of whom are not wealthy. Furthermore, labor (and particularly low-skill labor) tends to be the group least able to adapt to the higher costs imposed by corporate income taxes. After all, customers can easily switch their allegiance to a competitor, owners of publicly-traded companies can easily sell their shares in a business, and high-skill workers can more easily find employment elsewhere. Low-skill workers have no such luxury.
This is a very good way to frame the issue: focus on those at the bottom rung who are affected most by a corporate income tax. There’s nothing wrong with it, it’s entirely true the CIT affects consumers and workers more, but it avoids discussions of the 1% which people are destinied to lose (unless they’re talking in genuine Objectivist speak, namely about how that 1% ripped off everybody else through buying government officials.)
Problem, though, is that abolishing the corporate income tax will never fly. Period. Even under my second-best tax scheme, a flat tax on income, there would be a corporate income tax, and it would likely end up being slightly higher than the individual flat tax. Why? Simply put, because Americans are not going to buy it. Even the rank-and-file conservative American is going to look at this idea and say, “No way! Even corporations should pay something to give back!”
You may be able to ram it through using a lot of lobbyists and a lot of grease on Capitol Hill, but there will be a huge portion of the electorate unhappy. Even libertarians would be unhappy in that case, as it would just be another example of cronyism.
On the death tax (bolded emphasis mine):
Much like the corporate income tax, [the estate/death tax] leads to a tremendous amount of estate and gift planning geared entirely toward avoiding a large tax obligation and not toward more productive economic activity. Meanwhile, the policy has created a multi-million dollar lobbying industry that expends huge amounts of energy in pursuit of changes to a tax that currently represents just barely more than one-half of one percent of total 2012 federal revenues. Even if it returns to its inordinately high rate of 55 percent, it will account for just barely more than one percent of revenues next year.
If the goal of the death tax is to raise revenue to pay for essential government services, there are many other taxes that could raise what is a relatively small amount of money with substantially less distortion. The same is true even if, as most conservatives believe, the goal is to facilitate redistribution of wealth. For example, though it would be opposed by virtually all conservatives, a more steeply progressive income tax would achieve much of the “desired” redistribution with a fraction of the economic dislocation imposed by the death tax. Simply stated, there’s very little reason to have a hotly disputed, economically damaging tax that doesn’t raise much revenue.
The estate tax has always been extremely odious to me. We’re really need to take your money so badly that after you’re dead we’re going to take half the money you’re giving to your children. Seriously. We’re taxing dead people now? We’re taxing people’s inheritances now? I don’t care if the people receiving the inheritance are likely rich. That’s irrelevant. You don’t insert the government into someone’s will. Can we not have some propriety?
But the part I bolded should put the death tax down for good. That it raises so little revenue should end it. There are no good reasons to have costly and exhausting fights over just 1% of revenue.
Unfortunately, expect the left to go “but we need 100% of revenue to get through this! And another 25% more!” So we’ll see.
Finally, on tariffs:
Economists, whether conservative or liberal in their politics, agree almost unanimously that freer trade promotes efficiency and offers long-run gains for consumers. This is true even for unilateral action to reduce a country’s own tariffs without similar reductions from trading partners, because import taxes manifest themselves in the form of higher prices and reduced availability for domestic consumers. While there is emotional appeal to “protecting” a domestic industry by using tariffs to artificially raise the prices their overseas competitors must charge, economic analysis makes quite clear that such policies are self-defeating and hinder growth.
In the past, tariffs were high in part because of limited understanding of the benefits of free trade but also because the federal government needed a large revenue source. From the country’s founding until just before the Civil War, tariff revenue accounted for the vast majority of federal receipts, in some years comprising as much as 98 percent of the budget. In the following 150 years, freer trade and the advent of widespread income and payroll taxation (and a dramatically larger federal government) has led to a reduction in the relative size of tariff revenue, representing just over 1 percent of federal receipts today.
Eliminating tariffs would be a bold step in creating a much freer trade market to benefit American citizens and send an important signal to trade partners that the United States will not engage in damaging protectionism. This would be an especially important step given unfortunate rhetoric from both parties about desires to initiate a foolish trade war with China. Given the relatively small amount of revenue they now bring in, eliminating tariffs would be a courageous step toward a better and more conservative tax system.
This is a no-brainer. And if you want to win on it, it’s even more of a no-brainer: tie it to immigration. “So wait, you’re for the free movement of people and labor across our borders, but not the free movement of goods? WHAT?”
Tariffs would probably be the easiest to get rid of, at least in terms of getting lefties onboard. The protectionist right will probably wail, but couched in the terms of lower taxes, I think they will be drowned out.
I myself am pessimistic for tax reform in the fiscal cliff—I know for darn sure they’re not going to tax my ideal option—but this is a list of taxes we could probably axe. Still, on corporate income taxes, it’s not happening. Taking opportunity costs into consideration, Republicans and conservatives should focus on trying to end other taxes, but more importantly, just cutting spending overall. The more spending cuts, the better. That’s where it’s at.