BLUMBERG: But fortunately, as you know, plank three I think is something that people can get around - a massive tax cut.
SMITH: OK.
BLUMBERG: Are you ready?
SMITH: Yeah.
BLUMBERG: A tax cut that's an insidious tax. It's felt everywhere in the American economy. It destroys jobs, stops innovation.
SMITH: I am all for it. OK. Who gets this tax cut?
BLUMBERG: Not who - what.
BAKER: If I'm being blue sky here, I would say the corporate tax is totally a waste.
FRANK: The corporate income tax makes no sense whatsoever.
SMITH: You are killing the voters here. So far we've got raised taxes on the middle class and eliminate taxes on corporations?
BLUMBERG: Yeah. And those were the two most liberal members of our panel, Dean Baker and Robert Frank. And here's the reason that they and pretty much all our panelists hate the corporate income tax, which by the way is one of the highest in the world here in the United States at 35 percent.
BAKER: It doesn't make sense really to tax the corporation as such. What we want to do is - I'm going to sound like a Mitt Romney here. What we care about is if the corporation is reinvesting the money. What's wrong with that? Why do we want them to prevent - why do we want to prevent the corporation from reinvesting the money?
What we might want to prevent is giving the money to wealthy shareholders or them buying a second, a third, fourth home, getting a new Mercedes every six months, whatever it might be. That's where we want to have the taxes. We don't want to prevent Microsoft or General Motors or whoever it might be from investing more in improving their product line. That's a good thing in my view.
BLUMBERG: So a lot of people, you know, when they think the corporate tax, they want to keep the corporate tax in place because they want rich people to pay more taxes.
SMITH: And rich people own corporations.
BLUMBERG: Right. But our panel agreed. If you want to tax rich people - and not all of our panelists agreed, by the way, that you should tax rich people more than others - but if you did, if that's what you wanted to do, just tax rich people - do that. Don't tax the corporation.
tldr: Taxing corporations prevents them from reinvesting the money and doing such things as advancing technology and hiring workers. It is a terribly destructive tax, discouraging exactly the sort of activity that drives the economy. It's the people who own the corporation that you're trying to tax, so tax them when they get the money.
So, eliminate corporate tax but at the same time increase capital gains tax, i.e. stop taxing it differently (less) than earned income? My concern with that is people shifting their wealth to be held by a private corporation instead of personally held; "it's not my yacht, it belongs to Extra88 Inc." I think additional changes would need to be made to the nature of corporations to avoid abuse.
Your example of the yacht is already handled by the tax code (at least in Canada, likely everywhere else too). That is, if you take the yacht for weekend excursions that is a personal benefit and you should be paying tax on that.
A tax accountant might try to hide that, but if you get caught that's lying on your taxes and not looked kindly on.
These areas are likely why the rich, like Trump, are often under audit. Because there are so many ways they can play the system to avoid taxes. Hmm, maybe I just made your point.
It is a risk yes, but that kind of argument wouldn't make it past an IRS auditor. There is a reason many C-level staff today aren't compensated with benefits like housing and transport.
This already exists, if you're buying an expensive item such as a yacht or an airplane, it actually makes accounting sense to structure it into a corporate ownership. When you need to resell a pricey item, you might not find a quick buyer for a $50 mln item, but you might find 10 fractional buyers willing to pay $5 mln each.
For all intents and purposes, there's no tax associated with owning a yacht, either at personal or corporate level, so it's not like there's a massive loss of federal revenue here either way.
Can you explain that? How does does the source of the money affect what I do with it (dividends & interest vs. pay from the sweat of my brow & intellectual output)?
If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?
You'd always prefer $100 today vs $100 in a year. In order to convince someone to invest you need to offer them more than that in the future.
If the discount rate is 10% (not bank interest, just how much I personally value time) then unless you offer me more than $ 110, I'd rather spend the money now.
For people to invest, discounted_expected_return[1] - capital_gains should be higher than the money in their wallets.
You can play around in excel to understand this better, with a 5% return, a 20% tax on both income and capital gains and a 10% discount rate, $ 100 in income is either $ 80 today or $ 76 in a year.
I just want to emphasize something you hinted at: "expected return" usually involves an additional discounting factor which relates to risk and risk tolerance. An investment with a fixed return of 5% (a predictable $76 equivalent in a year) is very different from an investment with an expected return of 5% but a standard deviation of +-10% (anywhere from about $68 to $84). A lot of investors would treat that as worth a little bit less, because if it happens to go down, that is felt more keenly than if it goes up.
No, capital gains taxed less than wages incentivises investment over working. Which IMO is the wrong thing, because it's fundamentally regressive - young, poor but intelligent and educated people can only work, not invest, so we should encourage them by taxing them fairly.
And you think if you remove the incentive to invest, thus reducing the capital available to corporations, the same number of jobs will exist for those young poor people to work in?
I'm pretty confident that we do tax the poor fairly - in fact, thanks to credits, the poorest get a negative tax rate that nets them sizable "refunds".
but corporations can already reinvest in themselves tax free, and on top of that capitalizable expenses get to be spread across tax periods for tax sheltering purposes.
tax shields are so valuable to that they can actually be bought and sold as an asset separate to the corporation (in a not uncomplicated structure and set of circumstances iirc). typically this is done for shareholder benefit rather than for some coherent investment strategy (the benefit is not only capital but power and influence as well).
I've always wondered exactly this. Corporations aren't people. Why are we taxing them?
I think it gets a little trickier then the interview goes, though.
What's to prevent say, Bank of America, from buying its execs (and employees for that matter) second homes and cars and vacations with un-taxed money instead of paying them money directly in salary or in dividends?
> Corporations aren't people. Why are we taxing them?
IMO it is payment for special privileges. Limited-liability corporations are a way for owners (stockholders) to ask the government to give them a special exemption to avoid responsibility for certain mistakes or unprovable maliciousness.
Imagine a Deepwater-Horizon situation. If the corporation is bankrupt and the still-solvent investors are allowed to walk away and ignore the mess... Who fixes things, and whose money gets used?
> What we might want to prevent is giving the money to wealthy shareholders or them buying a second, a third, fourth home, getting a new Mercedes every six months, whatever it might be. That's where we want to have the taxes. We don't want to prevent Microsoft or General Motors or whoever it might be from investing more in improving their product line. That's a good thing in my view.
Sounds like a use tax would be more beneficial?
I have no formal economics training and would love to hear from the more educated.
BLUMBERG: But fortunately, as you know, plank three I think is something that people can get around - a massive tax cut.
SMITH: OK.
BLUMBERG: Are you ready?
SMITH: Yeah.
BLUMBERG: A tax cut that's an insidious tax. It's felt everywhere in the American economy. It destroys jobs, stops innovation.
SMITH: I am all for it. OK. Who gets this tax cut?
BLUMBERG: Not who - what.
BAKER: If I'm being blue sky here, I would say the corporate tax is totally a waste.
FRANK: The corporate income tax makes no sense whatsoever.
SMITH: You are killing the voters here. So far we've got raised taxes on the middle class and eliminate taxes on corporations?
BLUMBERG: Yeah. And those were the two most liberal members of our panel, Dean Baker and Robert Frank. And here's the reason that they and pretty much all our panelists hate the corporate income tax, which by the way is one of the highest in the world here in the United States at 35 percent.
BAKER: It doesn't make sense really to tax the corporation as such. What we want to do is - I'm going to sound like a Mitt Romney here. What we care about is if the corporation is reinvesting the money. What's wrong with that? Why do we want them to prevent - why do we want to prevent the corporation from reinvesting the money?
What we might want to prevent is giving the money to wealthy shareholders or them buying a second, a third, fourth home, getting a new Mercedes every six months, whatever it might be. That's where we want to have the taxes. We don't want to prevent Microsoft or General Motors or whoever it might be from investing more in improving their product line. That's a good thing in my view.
BLUMBERG: So a lot of people, you know, when they think the corporate tax, they want to keep the corporate tax in place because they want rich people to pay more taxes.
SMITH: And rich people own corporations.
BLUMBERG: Right. But our panel agreed. If you want to tax rich people - and not all of our panelists agreed, by the way, that you should tax rich people more than others - but if you did, if that's what you wanted to do, just tax rich people - do that. Don't tax the corporation.
tldr: Taxing corporations prevents them from reinvesting the money and doing such things as advancing technology and hiring workers. It is a terribly destructive tax, discouraging exactly the sort of activity that drives the economy. It's the people who own the corporation that you're trying to tax, so tax them when they get the money.