Tuesday, February 17, 2015

Robert Reich, the corporate income tax and the middle class

Robert Reich
I enjoy the writings of Robert Reich despite his liberal leanings.  He is intelligent and articulate and, most importantly, not dogmatic.  On his Facebook page last week he voiced his support for President Obama’s one time tax on the overseas profits of American corporations to rebuild America’s infrastructure.  In a 2 minute video he laid out his case that American corporations enjoy the protections of American trade policies without the penalty of being taxed. 
I immediately thought this was at odds with his prescription for corporate taxes in his 2009 book, Supercapitalism and the Transformation of Business, Democracyand Everyday Life.  But is it?
Then he argued that corporations should not be treated as people and that such treatment distorts their effect on government policy.  This is from page 218…

“The result of this anthropomorphic [treatment of corporations] is to give companies duties and rights that properly belong to people instead. This blurs the boundary between capitalism and democracy, and leads to a host of bad public policies. Consider, for example, the corporate income tax. The public has the false impression that corporations pay it, and therefore they should be entitled to participate in the democratic process under the old adage “no taxation without representation.” But only people pay taxes. In reality, the corporate income tax is paid—indirectly—by the company’s consumers, shareholders, and employees. Studies have attempted to determine exactly how the tax is allocated among these three groups, but the distribution remains unclear. What is clear is the corporate income tax is inefficient and inequitable.
“It’s inefficient because interest payments made by corporations on their debt are deductible from their corporate income tax while dividend payments are not. This creates an incentive for companies to over rely on debt financing relative to shareholder equity, and to retain earnings rather than distribute them as dividends. The result, in recent years, has been for many corporations to accumulate large amounts of money that the company then uses to purchase other companies or to buy back its shares of stock. Capital markets would be more efficient if these accumulated profits were redistributed to shareholders as dividends. “Decisions by millions of shareholders about how and when to reinvest these funds are likely to be, as a whole, wiser than decisions made by a relatively small number of corporate executives. Abolishing the corporate income tax would thus help capital markets work better.
“The corporate income tax is inequitable in that retained earnings representing the portion held by lower-income investors are taxed at a corporate rate that’s often higher than the rate they pay on their other income, while earnings representing the holdings of higher income shareholders are taxed at a corporate rate often lower than they pay on the rest of their income. As we have seen, under Supercapitalism, investors have far more power than they did decades ago. Their decisions about where to put their money to maximize their returns are similar to any other decisions they make about how to increase their earnings. Logically, there is no reason why their ‘corporate’ earnings should be taxed differently than their other earnings. Abolishing the corporate income tax and treating all corporate income as the personal income of shareholders would rectify this anomaly.”
To be fair, the two comments are taken out of context and provide Dr. Reich’s answer to two different questions.  In his book, he is advocating a policy that would favor the middle class by lowering the tax burden of owning corporate stock and mutual funds, cause corporations to be smarter about how they invest their capital, reduce corporate lobbying in Congress and create jobs in America rather than overseas.  His Facebook comments are made in the narrower context of the budget proposal submitted by the President to Congress earlier this month. 

His argument that American corporations enjoy the benefits of US trade policies is somewhat suspect, however.  Those policies are more favorable to our trading partners than to American corporations. 

Enacted in 1994, the World Trade Organization (WTO) has enabled emerging economies to participate in free trade with the industrialized world and has helped to alleviate poverty in those countries.  The rapid expansion of the global economy is among its myriad benefits.

However, the WTO puts every nation and every corporation on an equal footing and precludes the US from taking direct action to pressure trading partners to eliminate barriers to US exports and other unfair practices. Under this regime, American corporations do well to invest overseas.

If we want to help the middle class, lets address the underlying causes of their distress.  Overhaul of tax and trade policies is a good place to start.



  1. This description of how corporate taxes penalize the middle class is both articulate and compelling. Unfortunately, corporations and their BODs are portrayed as rich, greedy, evil people who do whatever they can to suppress the middle class. The naïve would argue that eliminating taxes on corporations would benefit the rich more than the middle class. If people on both ends of the political spectrum understand the fallacy of corporate taxes, why do we still have them?

  2. Jeffery Pyle
    Senior Software Developer PAR Springer-Miller Systems

    I haven't read Reich's book, but I do agree with abolishing the corporate income tax. The corporate income tax is a fiction as it is actually an indirect tax upon consumers and the stockholders. Governments love these indirect taxes as they don't appear as individual line items on people's budgets.

  3. Tom Jeanette, MEM, PMP
    Paladin Technical Services: Have Solutions Will Travel

    If corporate income tax is an indirect tax on consumers, then we can expect prices to come down if the tax is eliminated?

    I suspect prices will remain the same, with the extra profit going to the owners, and an increase in personal income taxes to make up for the loss in corporate taxes.

  4. Jeffery Pyle
    Senior Software Developer PAR Springer-Miller Systems

    As for as what Mr. Reich says about the corporate income tax in two quotes you provided, I agree absolutely.

    He fails to mention how our corporate tax system heavily penalizes businesses from reinvesting profits earned overseas into America. This also leads to companies legally funnelling profits into low-tax jurisdictions instead of paying higher rates in the USA. This causes less investment here and fewer jobs here.

  5. Sid Gudes
    Founder and V.P. at New Mexico Water Billing

    If corporate income taxes are eliminated, then prices will come down in those businesses that are heavily competitive, but will not come down in those businesses that have de facto monopoly positions. I think, in the end, price reductions would be proportional to profit margins.

    We'll be looking at a world where Walmart becomes more of Walmart: lowering prices and driving even more mom and pop stores out of business. And one in which Apple does not cut its prices, because, well, their customers will continue to buy Apple. Will McDonald's lower its prices, trying to regain the market share it keeps losing, or will it give in to employee protests and use the saved tax money to raise employee salaries?

    It would be _really_ interesting to see how the current Republican majority in Congress handles this. On the one hand, they're friendly to business, so would look at doing something like this, but on the other hand raising individual taxes is, for lack of another word, sinful. So their choices will be to cut spending (when's the last time Congress did that?) or to raise other taxes, which will anger some businesses (e.g. raising federal gas taxes would upset the oil companies).

    In the end, this isn't going to happen, not because it isn't a good idea, but because there would be too much change. Same reason the flat tax hasn't gone anywhere...

  6. Tom Jeanette, MEM, PMP
    Paladin Technical Services: Have Solutions Will Travel

    Prices didn't go down in Kansas when they eliminated corporate income taxes.

  7. Sid Gudes
    Founder and V.P. at New Mexico Water Billing

    State taxes, for corporations as well as people, are a fraction of federal taxes. But the problem with this Kansas law (I assume it's the one passed in 2012) is that it only affects pass-through entities, which include S Corporations, but do not include C Corporations. C Corporations are the big corporations such as IBM, Apple, Walmart, Home Depot...

    S Corporations, are, for all intents and purposes, small family partnerships. Although federal law allows S Corporations to have as many as 500 shareholders, the vast majority of them have 10 or fewer shareholders (99.4% of S Corporation returns filed in 2007 have 10 or fewer shareholders).

    The total net income of all S Corporations in the U.S. in 2007 was $401 billion. The total net income of all C Corporations was $27,000 billion (i.e. $27 trillion) in 2008. The Kansas law thus affects 401/27,000 = 1.5% of business volume, assuming the overall U.S. proportions hold in Kansas.

    I don't see the Kansas results as indicative of the effect of eliminating corporate income taxes at the federal level for all corporations.

    (S Corporation statistics: http://www.irs.gov/uac/SOI-Tax-Stats-S-Corporation-Statistics; C Corporation statistics: http://www.census.gov/compendia/statab/cats/business_enterprise/sole_proprietorships_partnerships_corporations.html.)

  8. Ed Wheeler
    Director of Manufacturing Engineering at Trenton Technology Inc.

    At this point I am for anything that actually reduces or eliminates the volumes upon volumes of tax code. Let's face it, anything other than a direct, straight forward flat tax rate is meant to drive "approved" behaviors and reward those who know how to play the game. Mega corps can have a literal team of tax lawyers to glean these nuggets written into the code, which the small mom and pop shops simply can't afford to do. Currently we have the highest corporate rate in the industrialized world, and we wonder why businesses are doing things to shelter themselves?

    Regarding Sid's comment about the new majority ("Meet the new boss, same as the old boss") I don't expect them to take any real meaningful approach to tax reform for a couple reasons. One is the president has made it clear that he views it as an issue of "fairness", results be damned, and two is the people established in Washington like the power that the cumbersome tax code gives them, regardless of party. Human beings generally don't give up power and advantage easily.