For as long as I’ve been an economics journalist [23 years, more or less], the mainstream view among economists has been that taxing capital – corporate profits, dividends, capital gains, savings and wealth in general – is:
1. Counterproductive, because capital investment fuels productivity gains and economic growth.
2. Usually futile, because capital owners have so many ways to avoid taxes and shunt the burden onto others.
The former argument has undeniably lost a little of its oomph. Influential papers that implied that the optimal rate of capital taxation is zero have been contradicted by new theoretical models.
The second argument, meanwhile, is the main target of the new book by economists Emmanuel Saez and Gabriel Zucman titled “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay” that has been dominating economic-policy talk for the past few weeks. What stood out most to me about the book was its authors’ refusal to accept that corporations and the wealthy cannot be forced to pay up. While I’m not sure I want to buy all the tax solutions that Saez and Zucman are selling, this aspect of their argument is both refreshing and, most likely, a sign of things to come.
Saez and Zucman are professors at the University of California at Berkeley, and frequent collaborators of Paris-based economist Thomas Piketty. Earlier research by Piketty and Saez used data from the Internal Revenue Service to identify previously unexamined trends in the higher reaches of the income distribution in the U.S., popularizing the term “the 1%.” Zucman has focused mostly on tax evasion and tax havens of the super rich.
This has gotten easier to track lately thanks to the Foreign Account Tax Compliance Act of 2010, which requires foreign banks to report accounts held by Americans to the IRS or face tax penalties.
Another such change is the Organization for Economic Cooperation and Development’s effort to rein in corporate profit shifting across national lines, which has resulted in requirements that multinational corporations report their country-by-country profits and tax payments to tax authorities. As a result, Saez and Zucman argue, countries are now able to insist that their corporations pay tax at a minimum rate even if they’ve shunted income through low-tax jurisdictions:
There are still ample rewards to manufacturing “stateless income” that escapes most taxation, something that large U.S. tech companies in particular have mastered. And overall, the U.S. corporate tax burden is now lower, as a share of gross domestic product, than it’s been since the Great Depression.
While corporate income taxes have fallen, the total local, state and federal tax burden in the U.S. is somewhat higher now than it was in the 1950s. The burden hasn’t gone away, it’s just been shifted.
There is a rich economic literature on the “incidence” of corporate taxes, with some arguing that, because workers have fewer options for avoiding taxes than corporate shareholders do, they bear the bulk of the burden. Saez and Zucman are dubious of this reasoning.
Contrary to what many ideologues say, economics has not “proven” that workers “bear the burden” of the corporate income tax. If this were true, then unions all over the world would be begging governments to slash it.
Corporate income taxes do have other issues. They can’t be calibrated to impose progressively higher rates on higher incomes of the wealthy in the way that individual income taxes can. Taxing corporate income as well as the capital gains and dividends that corporate shareholders receive also amounts to double taxation that can distort economic behavior.
But Saez and Zucman see corporate income taxes more as a backstop than the main event, and they favor avoiding double taxation by giving shareholders credit for the taxes that corporations pay. They also think capital gains taxes should be indexed to inflation to avoid the “opaque and random type of wealth tax” that unindexed capital gains taxes represent.
Other kinds of wealth taxes are fine by them, of course, and there is much to debate about their proposals. There’s also room for debate over whether targeting just the top of the income and wealth distribution in the U.S. can raise enough money to meet the country’s needs.
Still, it has been much remarked lately that most Americans are supportive of higher taxes on the very wealthy. But do you know what seems to be even more popular, and has been for decades? Higher taxes on corporations.
Justin Fox is a Bloomberg Opinion columnist.
