Two Reasons For a Corporate Income Tax

NB asks the question on the mind of every aspiring tax policy junky—why would you tax corporations as such?

Maybe this is stupid but after all the talk about corporate income tax lately (up here in Canada too), I find myself wondering what the point of corporate income taxes is. When you’re taxing a person, it’s easy to see where the money is coming from but when you’re taxing a corporation, what’s happening then? I suppose maybe it comes out of the pockets of the higher ups since there’s probably more flexibility in pay there but maybe it comes out of the pockets of consumers in which case it’s actually a regressive tax. What’s the deal?

As I understand it, there are two reasons for having a corporate income tax. One is concern about tax evasion. If you made corporate income untaxed, then you might see all manner of rich people incorporating themselves as a tax shelter and then you’d have some huge enforcement headaches.

The other (and realistically more important) reason is just pure path dependency. Marie Diamond wrote for ThinkProgress yesterday about a Texas House committee moving to enact a tax break for yacht owners amidst a state budget crunch. That’s in response to the fact that Florida recently cut its yacht tax. Now in both cases you could ask “how much sense does it really make to single out yachts for taxation?” and the answer is “not that much sense.” Clearly the intent is to levy a consumption tax whose incidence will fall on the rich, but there are many technically superior ways of doing this. However, the point is that when you’re in the midst of a state budget crisis, it’s dumb to scrap the tax and need to engage in even deeper cuts in public services. It seems to me that the corporate income tax should be reformed in a revenue-generating way. If that means congress wants to scrap the tax entirely and replace it with some other kind of tax, that’s worth talking about. But just scrapping it on the grounds that it’s not optimal doesn’t make sense. Lots of things aren’t optimal, and you’ve got to work with what you’ve got.