While President of the United States, Harry Truman made a remarkably succinct observation on economists. He said, ‘Give me a one-handed economist! All my economists say ‘On the one hand on the other’.
Economists tend to be a divided bunch – Winston Churchill once said ‘If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions’. They rarely even consider their own opinions to be true for all situations. But, The Economist recently posed a question that drew universal agreement by a number of eminent practitioners of the dismal science.
The Economist asked ‘How should governments tax capital?‘ and the responses might differ in specifics, but they uniformly agree on one thing – corporate taxes should be low, lower than they are now.
Scott Summer argues for a zero tax rate:
One of the most basic principles in economics is that the taxation of capital income is inefficient.
Hal Varian believes in low corporate tax rate, if higher than zero:
With respect to corporate rates, I would like to see low corporate tax rates. However if corporate tax rates are lower than individual tax rates, individuals can just incorporate and provide various services to themselves and their families via their corporate identity.
We don’t want to tax enterprise and ingenuity.
I would propose to: 1) greatly reduce taxes on corporate profits, with a value added tax being kept in place; and 2) for individuals, lump capital gains with labor income and tax the combined income at relatively flat rates.
Gilles Saint-Paul notes that some capital taxation may be worthwhile in the short-run but that:
In fact, this simple observation underlies a striking result in economics, namely that, in the long run, it is optimal not to tax capital at all! The reason is that taxing capital income amounts to taxing future consumption more than current consumption.
I’d like to see the tax system move in the direction of a progressive consumption tax. I don’t have a detailed plan in mind, and I recognise the many difficulties in devising such a plan. This would require lighter taxes on capital income and higher rates on the remaining tax base, all in the context of unsustainable future deficits.
What is quite astounding is that popular opinion on the matter is basically the exact opposite – corporations are massive, faceless, greedy institutions that deserve to be taxed into submission. Certainly, there are cases where corporations need nudges in the form of taxes or regulations to act in the public good rather than their own, but this is no different than individuals. Somewhere along the way, the general public became detached from the idea that incorporating was something that can benefit everyone from small entrepreneurs to Apple and Exxon.
Economists’ desire for low corporate taxes is one that may never fully take hold.