Monday, May 27, 2013

Should corporations be taxed?

Listening to an online  conversation last evening and, as an aside, I wondered whether corporations should be taxed, at least as far as the income tax code goes.  I cannot see that it serves a useful purpose.

The first question that must be asked is what taxes actually pay for.  Taxes, in our present economic system, do not pay for anything.  (I can hear brain cells, especially Stuart's, screaming from here.)

Please relax and bear with me as I suggest the logic behind that previous statement.  Since August 15 1971, our economy has been operating with a fiat currency.  To clarify, this means that our sovereign government has declared, by a fiat, that the currency it issues or symbolic entry on its records of that currency are legal tender for the resolution of debts in the country.  Further that the government offers no convertibility of its currency to any other commodity.

In order to create a demand and hence a market value for this currency, the sovereign creates and imposes taxes, a debt that can only be removed using the currency that the sovereign has issued.  This is one of the three purposes taxes serve in the economy. 

A moment's reflection will reveal that the sovereign, in this scenario, is quite free to issue all currency it needs to pay for the goods and services it needs and or wants. It has no need to tax or indeed borrow; in fact, it cannot tax or borrow until it spends, there is nothing in the economy for it to collect.

The spending, for infrastructure, public care, grants for public services, and military, move money from the public sector, the government, to the private, basically us. With this money the private sector can pay its taxes and then buy goods and services it wants. Assuming there are sub-sectors within the private of individuals willing and able to provide goods and services the cycle repeats until the supply ends.

If there is too much money pushed into the economy, demand can outstrip the supplier's ability to deliver. The government must watch for this by watching unemployment and other signs of inflation like rising prices and supply sources reaching full capacity. When these signs do appear, the government must move to curb the demand pressure. It can do this by decreasing spending or increasing taxes.

Note carefully: The DIFFERENCE between government spending and government taxes is referred to as the deficit. In order to control expansion or contraction of the economy it is the deficit that must be adjusted, not necessarily spending or taxes alone.

Once again, we have a important need for taxes, but once again we see that taxes are not used to actually pay for anything but just to balance spending by the government on what it wants.

Taxes have a third function. Taxes can be used to curb behavior that the government considers detrimental. There are an number of examples that come to mind but the one that seems to have disappeared, definitely to the detriment of our society, is the marginal tax rate on high incomes.

Money is an indisputable source of power. An individual or small group of individuals can, and indeed do, challenge governmental powers based on accumulated wealth. By placing a high tax on income over, say, $1,000,000, the sovereign power is protecting itself against challenge by a small minority.

Again, an important use for taxes; however, the revenue from this source would be too small to be considered useful in controlling the deficit.

Now, based on this chain of logic I argue that taxes don't pay for anything and, further, that taxes on corporations are likely counter productive. Corporations are not brought into existence to earn money for themselves and to pay taxes that may be imposed. In their simplest form, they exist to fulfill a demand, not create one. That they may be the source of a demand for good and services is only a reflection of the demand they are trying to fulfill.

Finally, corporations are not sentient. They only move according to the people behind them. Corporations do not, on their own, challenge governments. Taxes on a corporation serve only to test the ingenuity of the corporate officers in avoiding the taxes; it is the individuals who form the actual "brain" that must concern the government and ultimately us.

Remember, Al Capone, a reputed crime boss suspected of many crimes, as brought to court and sent to jail for --- INCOME TAX EVASION!! And you thought taxes weren't important.


Jay Ackroyd (@jayackroyd) said...

A corporate income tax is intended to prevent capital holders from shielding income from taxation, in the form of retained earnings.

Once a government has such a tax, it can indeed try to subsidize some sectors or activities via tax exemptions to corporations. But such stealth industrial policy making seldom ends well

Ron (AKA Albert) said...

Goodness, a real live comment. Thank you.

The only good thing about corporate taxes is that it reduces unemployment among lawyers.

The subsidization factor is of some concern but the rather questionable maneuvers used to avoid the taxes enhances a culture of cheating.