McCain's Corporate Income Tax

Economist Greg Mankiw discusses Senator McCain's proposal to cut the corporate income tax rate:

Lost in this hubbub, however, is a bigger idea that Mr. McCain and his economic team have put forward: a cut in the corporate tax rate, to 25 percent from 35 percent. It is perhaps the best simple recipe for promoting long-run growth in American living standards.

Cutting corporate taxes is not the kind of idea that normally pops up in presidential campaigns. After all, voters aren’t corporations. Why promise goodies for those who can’t put you in office?

In fact, a corporate rate cut would help a lot of voters, though they might not know it. The most basic lesson about corporate taxes is this: A corporation is not really a taxpayer at all. It is more like a tax collector.

The ultimate payers of the corporate tax are those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax. The corporate tax leads to lower returns on capital, lower wages or higher prices — and, most likely, a combination of all three.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

I think Professor Mankiw has explained the economics of this policy issue quite well. I think it is really, really important to pay attention to the fact that "a corporation is not really a taxpayer at all." The corporate income tax is shifted to people. One reason this seems important to understand is because a great deal of the political rhetoric about corporations and about the corporate income tax tends to emphasize some perceived "evil" which resides in the profits of corporations. For illustrations consider the recent Congressional hearings about "windfall" corporate oil profits, as well as the rhetoric of some presidential politicians regarding these oil profits. Just think, if corporations don't really pay taxes because the taxes are shifted to people, then it is also going to be true that corporations don't really receive profits because the profits are "shifted" to people.

I would also suggest that it is important to understand that another word for "profit," corporate or otherwise, is "income." Now I think we each like to have income. Income is a good thing. If you read Professor Mankiw's entire essay you should make note of another suggestion he makes with respect to taxes, i.e., to shift taxation away from corporate income and onto the sale of gasoline. The economic logic behind this suggestion is simply put as: tax bad things not good things. Many people see gasoline (carbon) consumption as resulting in many bad things (e.g. climate change and traffic congestion). So tax gasoline consumption and there will be less gasoline consumption. End or reduce the tax on income and there will be more income for people to enjoy. I would like to also note that saving and investment is a good thing. More saving and investment over time means an improved standard of living for everyone. Right now we tax savings and investment. It seems to me the simply logic of not taxing good things while taxing bad things, can be translated into support for a reform in our national tax policy to make greater reliance on taxing consumption while ending the reliance on taxing income, savings, and investment.