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No Taxation Without Sensation

The trend of corporate inversions has highlighted problems with our corporate tax code. Inversions happen when American corporations shift their corporate nationality to a foreign jurisdiction, often through a merger with a foreign corporation. These inversions avoid the 35 percent U.S. marginal corporate tax rate, one of the highest in the world.

A wide variety of commentators, including James Pethokoukis of AEI, have suggested that one response to inversions and other problems with the code is simply to eliminate the corporate tax. The result would simplify taxes, reduce corporate efforts at legal tax avoidance, and boost economic growth from greater corporate investment. Any revenue loss could be balanced by increases in other taxes. For example, individuals could pay ordinary rates of tax on dividends and yearly appreciation on the value of assets.  Additional ways of making up the revenue might include a carbon tax.

My point here is not to endorse any particular version of corporate tax revision (although I think moves in this direction would be sensible), but to note that such reform would be salutary for another reason that should be of substantial concern to classical liberals in formulating tax policy. The more individuals feel the pain of taxes, the more taxes will constrain the size and growth of government. It  is thus imperative to make taxes more transparent and more salient to individuals.

The corporate income tax may be the most egregious example of a tax that is not transparent. While corporations collect and pay the taxes, corporations do not ultimately bear the tax. People do –  the corporations’ shareholders, employees, and customers. But for any given company it is hardly clear how the corporation’s tax bill is shared by different stakeholders. Indeed, because of the fiction that the corporation is paying, most people may well think that the corporate tax is a free lunch.

Another example of government law that makes a tax less transparent is government withholding. Here at least people can access information about the money taken out of their pay check each week, but many, if not most, people become inured to the deduction. They would likely feel the tax more acutely if they paid it in lump sum at around tax time. Instead, many people have too much withheld and receive a refund when they pay their income taxes. To be sure, withholding protects against inability to pay when individuals fail to save an amount sufficient to pay their taxes.  But it also diminishes the pain of parting with money that is a natural restraint on government.

Reducing withholding by a significant percentage would make that pain more acutely felt. Perhaps this reform could be accompanied by moving the due date from taxes to April 15 to Oct. 30. That additional reform would make politicians feel the full pain of taxes as well!

Reader Discussion

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on August 11, 2014 at 15:00:09 pm

" individuals could pay ordinary rates of tax on dividends and yearly appreciation on the value of assets. Additional ways of making up the revenue might include a carbon tax."

Rather generous of you, John! Let us shift the tax burden to those who have had the tenacity to achieve something and save in the form of investments while eliminating the "invisible tax" that EVERYONE pays via corporate pricing in response to government tax policies. No, better to compel the seller to list that portion of the selling price that is used to offset tax burdens - sort of like some restaurants have been doing with the Obamacare costs or the mandated $15 / hr minimum wage.

I can not believe that you would even mention a carbon tax in the same essay that you argue for economic growth being hampered by taxation. Duh! what do you think a carbon tax would do in addition to crushing the working man.

"Reducing withholding by a significant percentage would make that pain more acutely felt. Perhaps this reform could be accompanied by moving the due date from taxes to April 15 to Oct. 30."

I agree that withholding does tend to lessen the visibility of the tax burden. However, to do as you suggest will open up another can of worms. I can just see it now - various "interest groups" coming out in defense of the "poor worker" who does not have the money to pay his taxes (never mind that he went on two vacations, bought season tickets, and receives a dividend from Budweiser for his volume of business). There will be calls for amnesty, we can engage a whole new legion of lawyers to both press the charges and defend the afflicted.
Of course, ultimately, this will prove to be fodder for the usual suspects - but it will be "painful" to watch and live through.

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gabe
on August 11, 2014 at 17:14:37 pm

The question to ask is not who pays the taxes or the method of collection. The question we must ask is: why do we need the taxes in the first place? Well over 90% of the taxes collected by the Federal Government goes for one of 4 things. 1.Military spending. Most of which is being squandered on bloated budgets,cost over runs,fraud,waste and useless un-Constitutional wars. 2. Social Security,again arguably un-Constitutional and bankrupt. 3. Medicare and Medicaid. Arguably un-Constitutional,corrupt and again bankrupt. 4. Interest on a National Debt that is created out of fiat debt currency,conjured out of thin air by a corrupt private bank called the Federal Reserve,which is neither Federal nor has any reserves. The Founding Fathers wrote into the original Constitution checks,balances and bulwarks against the exact kind of corruption that is bankrupting America today. Unfortunately Politicians and judges,over the last Century or so,have so twisted,amended,misinterpreted and or ignored the original intent of the founders that the current Constitution is meaningless. We don't live in a nation of laws but a nation of powerful men who are simultaneously corrupting and looting America. Look how these actions have bankrupted America,made serfs out of the American taxpayers,chased most of our industry out of the country and have left.for posterity,a bankrupt hollowed out shell that was once one of the greatest nations in history.

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libertarian jerry
on August 11, 2014 at 19:43:37 pm

C.mon Jerry:

Whether you (or I) like it or not, there is the 16th amendment to deal with it. It is real, it is legitimate and it is in effect.

And although I do not like the present tax burden or the uses to which said tax monies are put, the fact is that there are legitimate spheres of interest that the government should be directly involved in. I'll not bother to name them as it is or should be apparent to all.
Yes, government has overextended itself and its reach into our everyday lives but goodness sakes even during the revolution it was recognized that there was a need for taxes.

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gabe
on August 11, 2014 at 20:39:47 pm

Gabe.............Justice Holmes once said "taxes are what we pay for a civilized society." I agree. However another Justice,John Marshall once stated "the power to tax is the power to destroy." Income taxes are only a small amount of taxes in the scheme of things. There are payroll taxes,state income taxes,city wage taxes,sales taxes,inheritance taxes,tariffs,value added taxes,property taxes,alcohol and tobacco taxes,telephone taxes,tolls,fees,the inflation tax,fuel taxes,corporate taxes that are passed on to the consumer etc.etc.ad nauseam.There are over 200 taxes directly or indirectly on a loaf of bread. Today the average productive person in America works 8 out of 12 months of the year just to pay all their taxes directly or indirectly. Is it any wonder that a single breadwinner family is a thing of the past. Today over 2/3 of the American adult population are either employed by or live off of the state. Taxes in America on all levels,except during the Civil War,never exceeded 10% of GDP until the 20th Century. Our money was backed by Gold and Silver. There was little or no inflation. We imported and settled millions of immigrants from around the world. We built the largest economy,the largest middle class with literally no national debt,we were the largest creditor nation in the world and still taxes,on all levels were under 10%. Now what do we have today with taxes taking over 60% of GDP? A bankrupt nation,hopelessly in unsustainable debt with an army of parasites living off of whats left of the productive free market. And what have we left to our children and grandchildren? A society of debt slaves with a stack of unpayable debt in the hundreds of trillions. Some sphere of influence.

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libertarian jerry
on August 12, 2014 at 10:46:27 am

Jerry:

A much better formulated comment. The first seemed somewhat intemperate and detracted from your argument.

I agree with the assertion that taxes are far too high, too varied, and too far spread throughout the economy with every single step of the production (or service) process being taxed - and nobody sees it. But it is there and it is not corporations paying for it - it is the consumer.
So yes, whoever can effectively lower taxes on all of us has my support.

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gabe

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