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A Vision of the Tax Future

Posted by: Michael Mandel on December 19

Yesterday I went to the International Tax Policy Forum conference, “Who Pays the Corporate Tax in an Open Economy?”. By choice, I don’t attend many conferences, but after this one, I may have to go more often, because I saw a vision of the tax future (and no, I wasn’t smoking anything).

The topic of the conference was who bears the burden of the corporate income tax—that is, who ultimately pays the cost of it. Historically, the assumption has been that the burden of the corporate income tax falls on shareholders, or on capital in general. In either case, it is assumed to be a progressive tax.

But I walked away from the conference feeling like there was convincing evidence that in a global economy, that much of the burden falls on labor. The key session had a presentation of a new paper by Mihir Desai, Fritz Foley, and Jim Hines, and a discussion by Kevin Hassett. The conclusion of the Desai-Foley-Hines paper was that 45%-75% of the burden of corporate taxes is borne by labor (looking at multinational companies). (I can’t find an online link for the paper…when I get it, I will link).

More importantly, the results in this paper accorded with a paper that Hassett did with Aparna Mathur last year, which showed that higher corporate taxes have a negative effect on manufacturing wages in a country.

Now, if these results hold up, they are very important from a political point of view. The corporate income tax occupies a very interesting position in the tax structure. It doesn't bring in very much money, compared to the personal income tax or the payroll tax. And it's kind of funky from a theoretical perspective, since corporate profits mostly get taxed at the individual level as well.

The main justification for the corporate income tax is its progressivity--and if it's not progressive, there goes a lot of its political support.

With the corporate income tax on the table, it may be possible to get movement towards a "big" reform of the tax system. Which direction? Not clear yet. But I know something important when I see it.

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Reader Comments

Brandon W

December 19, 2007 03:37 PM

In my opinion, all federal taxes ought to be completely eliminated. The federal government should divest itself of all programs and turn them over to the States to run at that level per the choices of their local governments. There ought not be a single federal regulation of any aspect of the economy or society. All agencies would be disbanded. The federal government should simply maintain a military to defend national borders, and maintain a federal court system to regulate interstate disputes. The Senate could meet each year to formulate a budget for the purpose of handling those tasks, and the amount would be divided per-capita between the states. So, for example, each state might pay a "stipend" of $1700 per citizen to the federal government to handle its Constitutional chores.

This leaves taxation and the various programs - social and otherwise - to the States, where it ought to be. It creates inter-State competition for citizens and businesses. Some states may choose to have higher taxation and more social programs. Some states may choose to have zero corporate taxation, low personal taxation, and leave more money to citizens. The competition would be good and lower "prices" - i.e. taxes - for everyone, and people would have a choice of where to live that gave them the best combination of taxation and public programs to suit their tastes.

Joe Cushing

December 19, 2007 11:52 PM

That's interesting. I've always thought the consumer paid for CIT and that it was priced into the stock market already. Some would argue that taxes encourage capital investment because it is subsidised by generous depreciation schedules. Since capital investment generally improves wages, I'm surprised they are the main loser. It makes sense though, any reduction in the quantity of goods demanded would be felt by labor. There is more competition from outside sources for investments and goods than for labor too. Also, in countries where taxes are higher, laborers may have lower costs of living because the government pays for things for them--health care for example.


December 20, 2007 12:43 AM

"Historically, the assumption has been that the burden of the corporate income tax falls on shareholders, or on capital in general."

Have academic economist actually been making that assumption? Sometimes you guys really mystify me. It seems obvious that corporate taxes are borne by the consumer (certainly for any tax policy applied economy-wide or industry-wide). Actually I thought that WAS the assumption, God knows I've heard it enough.

And it's become increasingly clear that taxes may drive businesses offshore where possible, hence the impact on labor.

I would think returns to capital are going to be the LAST thing affected. Average margins are surely more governed by competition than taxes.


December 20, 2007 04:20 PM

Perhaps the Fair Tax people should try applying it to corps, tax sales, no complexity or deductions. I am loathe to eliminate it as they would simply become hidden shells in tax game.


December 21, 2007 12:48 AM

Brandon W,

That would be good, but of course is not realistic in the present state of things.

This would, however, cause the high-tax blue states to go much higher in taxes, and the low-tax red states to go lower. As we know, blue states steadily lose population to red states at the approximate rate of 7 electoral votes per decade (as was the change after the 2001 census). The 2011 census will move another 7 electoral votes out of NY, PA, MA, etc. into TX, NC, AZ, GA, FL. Even CA is losing US citizens to other states now.

A state-centric plan will accelerate this migration much more quickly, and the difference between low-tax and socialist states will widen greatly.

Brandon W

December 21, 2007 11:43 AM

Actually, it would probably lower blue-state taxes and raise red-state taxes. Almost across the board blue states pay more into the federal government than they get back, and red states get more from the federal government than they pay in. I.e., the blue states subsidize the red states. If this were to go in to effect, blue states could relatively lower their taxes and maintain what services they have, while red states would be required to raise taxes just to maintain their current infrastructure. Overall, that would probably "level the playing field" some and keep more blue-state residents from exiting to red-states just for their lower tax rates. It may be that once the red states aren't being subsidized they would have to meet the demands of their citizens to provide some social services they were previously getting from the federal government, and thereby require red states to increase taxes further. Or maybe not. That would be up to each state to decide; do citizens want more social services and things like public education with higher tax rates, or do they want lower tax rates with the need to send their kids to privately run schools and rely on charity to assist people in need. I'm not making a judgment either way; it's just likely how it would play out. The red states do currently enjoy the perks of federal government spending while blue states pay for it. Having said that, if blue states maintained high social service levels at the expense of high taxation, they may find that corporations don't want to locate there, making it difficult to keep people employed and support a tax base. It would definitely be a balancing act but one that could be better handled at the more local levels. The inability of the States to deficit spend would also stop governments from trying to have their cake and eat it too; they would be required to either have more services with higher taxes, or fewer services with lower taxes. Politicians could no longer cut taxes and put the country into more debt borrowing money to pay for all their promises.


December 24, 2007 10:52 PM

Brandon W,

What you said is high inaccurate. It is widely known that higher-income people vote 'red' while lower income people vote 'blue' :

If some 'blue' states have high tax revenue, it is still due to the high-income GOP voters in that state. 60% of Wall Street voted for Bush in 2004, even though that happens to be in a 'blue' state. 72% of the Forbes 400 voted for Bush, while just 28% voted for Kerry.

Nonetheless, blue states always lose population to red states due to lower taxes on productive citizens. At the county level, the gaps are even starker, with 97 of the 100 fastest growing counties voting for the GOP in 2004.

Also, you seem to think that the value/quality of 'services' is directly proportional to the tax dollars they receive. This is hugely false. The US spends more per student on public education than any other country, but it is still a disaster due to left-wing teacher's unions trying to force children to experiment with deviance rather than learn math and science.

The tax-eaters, i.e. lower income people, vote Dem, but thus induce the productive people to go elsewhere. This is why CA is losing people to NV and AZ in droves, while the Northeast is losing to NC, GA, and FL.

Brandon W

December 25, 2007 09:18 AM

Anyone who uses the phrase "it is widely known" is highly suspect, and your state ment that "high income" vote for Republicans only and that "low income" vote for Democrats is both hyperbole and untrue. One simple statistic can blow that idea out of the water. 95% of U.S. workers make less than $105,000/year. No Republican would ever get elected only by the votes of the wealthy. The majority of voters for BOTH parties are not wealthy. Use your head.

You can reference data from the Tax Foundation here:
You will note that almost all the states receiving more federal money than they pay in are "red" states, and almost all the states paying more into the federal government than they receive back are "blue" states. As an example, if Mississippi receives $2.02 in money and services from the federal government for every $1 they pay in. If this were cut off, Mississippi would suddenly get it's revenue cut by more than half. Don't you suppose they would then need to increase their taxes to maintain what infrastructure they need to run their state? I think that's an easy one to understand. Alternatively, Connecticut pays $1 in, and only receives $0.69 back. If the my no-fed-tax plan were in place, Connecticut would receive almost a 45% boost in revenue without changing their tax rates! Alternatively, they could cut their tax rates by over 30% and retain the same levels of services they currently offer. MS has to double their taxes, CT gets to cut theirs by 30%. This kind of thing is almost across the board, red state vs. blue state. It would be my hope that the blue states would cut their taxes, but in my view that's a local issue for each state to decide.

I quote the following from the Not-So-Liberal Wall Street Journal:
"Of all the Democratic complaints about the presidential election, the most interesting and ironic came from Lawrence O'Donnell, a leading party strategist and former aide to Sen. Pat Moynihan. He complained on MSNBC that, "The segment of the country that pays for the federal government is now being governed by the people who don't pay for the federal government." Mr. O'Donnell added for good measure, "Ninety percent of the red states are welfare client states of the federal government.""
The rest of the article is here:
This article alone doesn't prove anything, but it's one more piece of information from the real world that you don't seem to want to know about.

Kartik, it is you who are drinking the Republican Kool-Aid instead of thinking.

One more thing. People are leaving the Northeast and California because the cost of housing has become ridiculous in those areas, whereas housing is relatively cheap in NC, GA, NV, AZ, and most areas of FL in comparison. It's supply and demand in effect, and nothing more.


December 27, 2007 01:45 AM

Brandon W,

I see that you avoided looking at the link I sent you. This is CNN polling Data :

Even the middle class making between $50K and $75K a year voted 56% for Bush and just 44% for Kerry. Kerry commanded a majority ONLY in the group making under $30K a year.

The middle class thus voted solidly for Bush, as did the upper class. How can you avoid such plain facts?

Since the top 10% pay 73% of all taxes, and the bottom 90% pay just 27%, indexing this across the table in the link shows that about 80% of income taxes are payed by those who voted for Bush in 2004, and only 20% were paid by Kerry voters. The gap between which party attracts the votes of productive people vs. which repels them, is immense.

A "blue" state like CA has 45% Repubs and 55% Dems. A red state like FL has 52% Repubs and 48% Dems. This 7-point difference is tiny, thus your whole obsession with treating blue vs. red states as monolithic entities is silly and evidence of low understanding of statistics. In Connecticut, for example, live a lot of Hedge Fund managers. They support the GOP over Dems by a 60%-28% margin. Thus, the economic power of CT is due to Republicans there : even if they are a numerical minority, they make up the majority of the tax payers.

If you think what you do, why have "blue" states like CA, NY, and MA elected Republican Governors in recent years? (sound of crickets chirping as Brandon dodges this point).

"Lawrence O'Donnell.."

Lawrence O'Donnell is also someone who thinks Mormons are more destructive than Muslims. Some example you have chosen. If that is the best you can do, that is sad.

"People are leaving the Northeast and California because the cost of housing has become ridiculous in those areas"

BECAUSE of leftist zoning and rent-control rules. There is still a lot of flat land in the Bay Area and Los Angeles, but new construction is not allows.

The productive are leaving the high-tax areas to go to low-tax areas. This causes a net flow of 7 electoral votes per decade.

I have given you many links through which you can educate yourself. I suggest you study them.

Mike Mandel

December 27, 2007 08:04 AM

No personal insults please, as much as I enjoy them.

Joe, Kevin--you know, I would have agreed with you...but it turns out that the "official" incidence assumption for many years was that corporate income tax fell on capital. For example, the CBO's annual tax analysis assumes that

"corporate income taxes are borne by owners of capital in proportion to their income from interest, dividends,
capital gains, and rents."

This has the effect of making the tax system seem more progressive.

Brandon W

December 27, 2007 11:55 PM

I'm not sure why you keep going on about who votes for what in what states. "Red" states voted in majority for Bush in 2004, and "Blue" states voted in majority for Kerry. I ignored your link because your whole argument is completely irrelevant to what I'm talking about. The fact is, those "Red" states - in which the majority of citizens voted Republican - extract more money out of the federal government than they pay in. The fact is, the "Blue" states - in which the majority of citizens voted Democratic - pay more into the federal government than they get back. The surplus money the Blue states are forced to pay in to the federal government ends up subsidizing the Red states. If I'm a "Blue" state citizen - REGARDLESS if I'm a Republican or Democrat - I'm ticked off about that. If I'm a Blue state citizen - REGARDLESS of party affiliation - I would like to stop subsidizing the Red states, and I would like to be able to have my taxes reduced without reducing my services. If I'm a Red state citizen, well, I'll be really mad if all of a sudden my taxes have to go up and/or my state's infrastructure starts collapsing. But you know what? Too bad. No state should be receiving more than it pays in, and no state should be paying in more than they get back. My suggestion results in each state having to take care of their OWN d*mned business, and competing in an open market for citizens and businesses. If Red states can "steal" citizens - as you keep repeating - in an open market competition where they are required to compete on their own with a tax/service ratio that balances, then that's splendid. Let them. Right now, they're getting an increase of citizens at the expense of other states that subsidize them. I don't support subsidizing farmers, car manufacturers, or anyone else. I don't support states subsidizing other states. I support REAL free market competition.

Kartik... do you?

Tim Worstall

January 7, 2008 06:35 AM

The CBO published a paperseveral years ago insisting that at least 50% of the corporate income tax fell on the workers.

In fact, I'm amazed that you think that capital pays it: it's always been a standard assumption that it is paid by some combination of the workers in lower wages, investors in lower returns and customers in higher prices. The only question has been the proportions. And as capital is more mobile than labour, it's also always been and assumption that labour is paying more than captial.

ryan caley

June 18, 2009 03:58 PM

These idiots on here saying that red states take more from the federal government are insane! Blue states are sucking every citizen dry, have much larger deficits state wide, and took more federal aid money than red states did. Over all, blue states are taking more in from every corner than red states. And, if the structure ever changed, I'm sure the red states would immediatly think of how to cut some of the "fat" and make cuts rather then assume they can just reach into more peoples pockets.
Death and Taxes!

I for one am living in New Jersey and putting my place on the market and getting the heck out of here so I can put some money away and retire. At the rate I'm paying now in taxes, I'll never be able to retire... oh, but the Democrats are for the "middle class" HA! Such bull$#*t

Brandon W

June 18, 2009 05:11 PM

Since I'm likely the "idiot" you are trying to attack, let me point out something. If you look at the link I provided above, you can reference the statistics from the Tax Foundation. For every $1.00 your "blue" state of NJ pays in to the federal government, you received only 61 cents back. Meaning, 39 cents of it went out of your state, somewhere else. Where did it go? Primarily to "red" states like Mississippi, Alaska, and South Dakota. The chart demonstrates this. "Blue" states absolutely did not take more federal aid money than "red" states, as you assert. So my argument was merely that your state shouldn't be subsidizing other states. You and your state are suffering; you and your state are paying higher taxes because you are sending 39 cents of every dollar off to other states (very heavily leaning "red"). I am merely arguing two things. First, even under the existing system if you pay $1 in, you should get $1 back. You should not be subsidizing other states. Second, I argued in my original comment for the idea of eliminating the federal tax scheme altogether. In which case, you would not be sending 39 cents off to subsidize other states. You could be keeping that money in NJ and the end result would be lower taxes for you while enjoying the same level of public services. The result would also be that "red" states would have a lot less operating revenue because they would no longer get that 39 cents from New Jersey (and other "blue" states). They would have to cut services and let infrastructure crumble, or raise taxes. It's not a value judgment, and I'm not attacking anyone. It just is what it is. If I were you, in NJ, I'd be pretty ticked off knowing that 39 cents of every dollar I paid in taxes to the U.S. was going to subsidize other states instead of coming back to my state pay for roads and education.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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