Corporate Income Tax: Worry About Distortions, Not Investment

The blogosphere is aflame with a new set of posts of posts about the fact that the corporate income tax doesn’t cost corporate America very much money and seems largely uncorrelated with non-residential investment, though things may be different in developing countries.

The thing about the corporate income tax, it seems to me, is that we should be leery of a tax that manages have such a high rate and yet raise so little revenue. If a tax isn’t raising much revenue, then it ought to be either that you have a very low rate or else that you’re taxing something trivial. Here in DC, they levy a five cent tax on plastic bags at the supermarket, and nobody is shocked to learn that this doesn’t raise much money. But if you’re leveling a 35 percent tax on corporate income, it ought to raise a lot of money. In fact, it raises very little because the corporate income tax code is shot through with loopholes and firms squeeze tons of activity into exempt activities. But this — the distortions — rather than the burdensomeness of handing over the money is what we should worry about. The corporate income tax induces a lot of tax-related lobbying and accounting and lawyering activities. Or consider that interest on debt is tax deductible, which encourages firms to finance through leverage rather than through equity. It’s the high rate which makes that subsidy so valuable. Or even the now-infamous accelerated depreciation schedule for corporate jets.

This is all bad stuff. We could gain lot by lowering these rates and making up the lost revenue. That could be a classic “lower rates, broader base” reform. It could be higher taxes on rich people. It could be taking grand ma’s Medicare away. The conventional wisdom is totally right about this. The problem, obviously, is that rich people don’t want to pay higher taxes and non-rich people don’t want grandma to lose her Medicare benefits. If the CEOs who wine about the corporate income tax were serious about it, they could start lobbying for the “replace it with higher taxes on rich guys like us” plan. But they prefer lower personal tax burdens and a less efficient economy.