My stimulus proposal: rotate taxes from business to individuals
Topics: Stimulus
04 Feb 2009
From: Ervan Darnell
As before, I think all cures are worse than the disease here. But if we
are to deficit spend, I have a proposal: cut business taxes now,
permanently, and raise income taxes later.
I've made in pieces the argument for tax cuts instead of government
spending before: The spending is usually unproductive. Much of it is
pork-barrel and/or corrupting. Many of the programs being considered
will last indefinitely and are not really counter-cyclical stimulus at
all. Massive handouts create all sorts of economic distortions as
winners are punished, business divert resources to lobbying, etc. Tax
cuts on the other hand spread evenly throughout the economy and go to
places where the money is actually productively used.
The liberal objection to cutting taxes for stimulus is that people will
save the difference instead of spending it, especially given that rates
will rise again, thus defeating the purpose of stimulating spending.
I'm not sure that's a bad thing as people were previously spending money
they didn't have, living on debt, but so be it for the same sake of
argument. Okay, the real liberal objection is that tax cuts are not a
means to permanently expand the size of government, but they are
generally cautious not to say that so loudly.
But working with the stated objection of increasing the savings rate, my
plan fixes it: cut business taxes and declare it permanent. Businesses
will not save the money for future tax increases because there won't be
any. Besides, business operate on credit not savings. If business
operated on savings, they would be investment companies better at
investing than producing the product they produce. Of course, there are
lots of particular exceptions like retirement trusts, but for the most
part the point of being in business is to generate revenue producing
something, not investing in other companies. Besides, the argument is
that we are in credit crunch where businesses cannot get credit. What
better way to subsidize them than let them keep their profits? That's
even better than credit, which has to be repaid and requires future
economic assumptions. A tax cut helps their bottom line now regardless,
and can be used for internal credit needs or investment, whichever is
needed more. It's strictly better for business than more fed-subsidized
lending.
The flip side is that maybe consumers would cut spending as much as
corporate taxes dropped in preparation for the coming tax hikes. This
seems unlikely for several reasons. First, it requires a hyper
intelligent public, one so intelligent it never would have bought houses
it couldn't afford in the first place. Second, most people are right at
the line already and would never have the discipline to save for a
hypothetical like this.
The U.S. has the second highest marginal corporate tax rate in the OECD
and we want to create jobs? The economic value of cutting corporate
taxes is obvious. It's easier to ship jobs overseas than it is for
individuals to move. Rotating taxes to individuals makes long run
economic sense. It also removes all sorts of capricious tax brackets on
corporations that are even worse than individual loop holes.
But isn't it unfair to individuals? No, it's not. Corporate taxes are
some combination of payroll tax, dividend tax, and sales tax. Cutting
corporate taxes lowers product prices, raises salaries, and raises
investment profits. It doesn't matter what the exact mix is. The
future tax increases can mirror the mix so that the income distribution
is not affected (or for that matter, shift it all to income tax and make
the system more progessive, I'd accept that trade-off for the other
benefits that come with it).
Of course, the rub here is the anti-trade bias. Most people don't
believe that markets actually operate. They feel that a tax break to
business does not lower prices and that higher taxes on business don't
increase prices. This is utter nonsense, but a commonly held belief.
Tragic that such a basic fallacy makes it impossible to do the right
thing.
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