Progressive Opposition of Business Taxes

Philosophy Forums Society, Government, and Economics
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Taxes on business, particularly big business, are a favorite of many progressive politicians and their supporters. It’s appealing to burden large, rich companies with the bill to pay for progressive social programs. Businesses don’t vote, they are difficult to humanize, and they some really do have deep pockets. But this impulse is wrong, it is anti-progressive, and it hides a form of regressive taxation.

Taxing businesses will lead to lower wages for workers, and that decrease in wages will be greater for those with the least power within the business. Prices will increase for consumers of the business’ goods or services will increase, again with goods and services catering to the most dispensable sectors being increased more. These increases will tend to burden the poor more than the rich, so that however much they fund progressive programs, they will exacerbate the very problems these programs seek to address.

This is speculative, and that highlights what may be the worst aspect of business taxes: when businesses are taxed, it is not clear how businesses respond. We can get an idea by e.g. looking at changes in the corporate tax rate and seeing how prices and pay rates change in response. But this method will always be imperfect, and some measure of the real burden of taxes felt by different segments of the population will be hidden.

At least two arguments in favor of business taxes are worth addressing:
First, businesses as businesses enjoy some rights, and they should pay for them. Businesses as legal entities can own property; they have access to the police and the courts; they insulate their owners from liability; in some places they may even have the right to lobby government and to affect politics. The response to this is that most of those rights in fact protect the interests of the owners of the business, and a tax on income will account for income dependent upon those protections. Other rights are rights that we probably don’t want to give to companies, but to their owners, and taxing the company gives credibility to the idea that the company should have the right to represent itself in e.g. politics.

Second is more pragmatic: businesses are cheaper to tax because there are fewer of them; even if we’re already taxing individuals, it makes sense to have a large share of tax revenue come from businesses, because it’s cheaper to verify their accounting and thus takes importance off individual tax returns (so we could be sloppier or more forgiving). This doesn’t necessarily seem to be the case: businesses accounts can be much more complex than individual accounts. Similarly, their attempts to avoid taxes are likely to be much more sophisticated and effective as a result. Finally, there are likely to be other cheap ways to tax that do not have the same pitfalls as business taxes. For example, taxes that are paid by businesses but that are not taxes on businesses (for example, a business would still pay a land-value tax for any land of which it was the legal owner).

Because they are likely to be regressive in their ultimate effect on society, and because their existence masks the real tax rate felt by all members of society and thus stymies conscientious, progressive tax policies, taxing businesses is likely to be anti-progressive. Supporting them is a mistake that too many progressives make.

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I am not against taxes as a rule. That being said, is there a reason why taxing wealthy individuals wouldn’t have the same effects as you describe? It seems to me that wealth is fungible enough that business owners being taxed as individuals will make the same kinds of decisions as business owners being taxed through their business.

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Carleas: Taxes on business, particularly big business, are a favorite of many progressive politicians and their supporters. It’s appealing to burden large, rich companies with the bill to pay for progressive social programs. Businesses don’t vote, they are difficult to humanize, and they some really do have deep pockets. But this impulse is wrong, it is anti-progressive, and it hides a form of regressive taxation.

K: They enjoy the benefits of our society, they should pay for those benefits.

C: Taxing businesses will lead to lower wages for workers, and that decrease in wages will be greater for those with the least power within the business. Prices will increase for consumers of the business’ goods or services will increase, again with goods and services catering to the most dispensable sectors being increased more. These increases will tend to burden the poor more than the rich, so that however much they fund progressive programs, they will exacerbate the very problems these programs seek to address.

K: taxing business doesn’t led to lower wages for workers. Recall in the years before the big Kennedy tax cut,
business were heavily taxed and it didn’t decrease their wages. Again, how does a tax increase reduce service or
increase the cost of goods. That basic part of your argument is simply not proven.

C: This is speculative, and that highlights what may be the worst aspect of business taxes: when businesses are taxed, it is not clear how businesses respond. We can get an idea by e.g. looking at changes in the corporate tax rate and seeing how prices and pay rates change in response. But this method will always be imperfect, and some measure of the real burden of taxes felt by different segments of the population will be hidden.

K: again to run your business based on tax cuts is simply bad business managing. It is simply part of the cost
of doing business and can be accounted for like wages and utility bills.

C: At least two arguments in favor of business taxes are worth addressing:
First, businesses as businesses enjoy some rights, and they should pay for them. Businesses as legal entities can own property; they have access to the police and the courts; they insulate their owners from liability; in some places they may even have the right to lobby government and to affect politics. The response to this is that most of those rights in fact protect the interests of the owners of the business, and a tax on income will account for income dependent upon those protections. Other rights are rights that we probably don’t want to give to companies, but to their owners, and taxing the company gives credibility to the idea that the company should have the right to represent itself in e.g. politics.

K: If I am tax to support the infrastructure that makes my life easier, then business too should be taxed. The basic
flaw that exist in business is the idea that businesses are “people”. that single idea has insulated businesses and their owners from being held accountable for their actions. So if they can hide from being held accountable, they
should be taxed at a higher rate… once again business is being held to a different and easier standard then I am,
and that is wrong.

C: Second is more pragmatic: businesses are cheaper to tax because there are fewer of them; even if we’re already taxing individuals, it makes sense to have a large share of tax revenue come from businesses, because it’s cheaper to verify their accounting and thus takes importance off individual tax returns (so we could be sloppier or more forgiving). This doesn’t necessarily seem to be the case: businesses accounts can be much more complex than individual accounts. Similarly, their attempts to avoid taxes are likely to be much more sophisticated and effective as a result. Finally, there are likely to be other cheap ways to tax that do not have the same pitfalls as business taxes. For example, taxes that are paid by businesses but that are not taxes on businesses (for example, a business would still pay a land-value tax for any land of which it was the legal owner).

K: So in other words, because they have fancy lawyers and accountants to escape taxes we should let them go??
I for one think they should be held by a far, far higher standard than I should be because of the money they make and can hide.

C: Because they are likely to be regressive in their ultimate effect on society, and because their existence masks the real tax rate felt by all members of society and thus stymies conscientious, progressive tax policies, taxing businesses is likely to be anti-progressive. Supporting them is a mistake that too many progressives make.
[/quote]
K: you still haven’t shown us how taxing business is regressive.

Kropotkin

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Decrease them compared to what? Presumably some earlier time when the businesses were not as heavily taxed? Got some data? Meanwhile,

en.wikipedia.org/wiki/File:US_Re … 4-2004.gif

Kennedy’s tax cuts began to be implemented in 1962. So it certainly looks like whether or not heavy tax increases decreased wages as compared to some unspecified earlier time, decreasing those taxes correlated to an increase in wages.

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Businesses of a certain size become a whole different animal. In the absence of policies which truly limit the power of these behemoths (and like behemoths they live large but can die hard), their stability and value become integral with the public good. The very idea of “taxing” such entities retains the idea of their independence, but their independence is hardly the case. They are bailed out because of their inseparability with the public good - their responsibilities should therefore be commensurate.

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Yes, but this is a good point. The effects would be similar, and you could describe them in the same way, but they wouldn’t be exactly the same, and they would be better to see in individuals than in businesses. The effects that are likely to occur in both businesses and from individuals are avoidance of the taxes, pass-through of costs to consumers and employees, and reduced output.

Tax avoidance: A corporation is likely to be better at avoiding taxes than are a group of individuals. If a large pool of money is being assessed a large net tax, it makes sense to spend a lot of money to try to mitigate the taxes. An investment in tax avoidance would likely scale well, so that the return on investment in a dedicated tax-avoidance specialist is higher for a large pool of money, and similar return can’t be achieved by several individuals hiring tax specialists for several smaller pools that add up to the same total. Additionally, businesses can more easily move money with a pool to balance profits and losses in optimal ways to minimize tax liability. A group of individuals can’t easily shift money between themselves to minimize liability.

Pass-through of costs: in the absence of transaction costs, these might be the same, as businesses would be forced to pay more to their wealthy workers to reach the same after-tax income, and/or to charge their wealthy customers less. But we don’t have a totally Coasian market, and as a result businesses will probably under compensate their wealthy workers and customers, and actually produce a greater profit. People tend to irrationally value what they have more, so being taxed and then spending less feels better than not being taxed and spending more, even if the net result is the same. The wealthy worker and consumer would probably not get back to the same equilibrium. Assuming progressive goals, this is a good outcome. Furthermore, if we’re really looking at wealth and not just income, taxing wealthy people rather than businesses will hit people with high wealth and low income more than people with high wealth and high income, something that business taxes don’t necessarily do.

Output: taxation reduces output, and it will do so whether it is a tax of an individual or a business. Even assuming that the reduction is approximately the same (which it may not be; if there’s any lumpiness in the pool output, taxing individuals will produce a greater net reduction in output), we need to ask which reduction in output is likely to produce a greater loss of social utility. I think there’s good reason to believe that taxing individuals will reduce social utility less than taxing businesses. Businesses have different motives, and generally behave more rationally than individuals. They are also driven more by social demand, so their loss of production will probably be of something socially valuable. Individuals, by contrast, have less information, behave less rationally, and may well reduce output that is in fact socially less valuable. In general, individuals are less sensitive to the condition of society as a whole than are businesses. Therefore, output that is likely to benefit an individual is less likely to be in line with the goals of society than is the output of a businesses.

Also, I think the gains in transparency are real. A business is a legal fiction. It has no life other than the lives of the individuals that constitute it. We should care more about the tax burden on individuals, and it is a benefit for democratic policy-making when that burden is not opaquely mediated by the black box of a business.

Hi Peter, thanks for your reply:

I think there is disagreement about this among economists. I will leave the debate of the specific example you raise to you and Uccisore, I’m not familiar with it. I will say, though, that whatever changes in wages are likely to lag. A corporation assessed with new tax won’t necessarily immediately lay off its workers, but likely will change hiring policies and starting salaries over time. A recent paper about simulation of the elimination of corporate income taxes found an increase in real wages as an effect, which is to say that wages are lower than they could be because of corporate taxes.

However, I think the intuitive case is strong on its own. Taxing a business reduces its profit, meaning that each worker’s contribution to the net profit of the business is less. Thus, if a business is paying a worker based on the value that the worker gives to the business, the business will pay that worker less. If every dollar of value that worker produces for the business muse be discounted by a share of the taxes, the value of the worker to the business is lower, and the business will lower wages in response.

I have to disagree. A business seeking to maximize profit should be expected to change its business practices in response to tax cuts when those tax cuts affect is profitability. Perhaps this just begs the question of whether business taxes affect wages and prices.

This strikes me as an emotional argument, in the sense that it has to more to do with fairness as between individuals than with the policy that produces the best outcomes for society. Business are not people, there is no fairness with respect to their taxation. Put the statement another way, to refer to the individuals who constitute the businesses:

This sounds much less certain. Why don’t we tax the individuals who enter into the partnership, instead of the partnership itself? As I said above, I think there are situations where taxing the partnership directly (like when taxes are levied against property that is owned by the partnership), but income tax does not strike me as such a tax. If we provide infrastructure to individuals to use, we should let them use it for the purposes of a legal partnership.

Anon, your argument seems to be that we should tax businesses because they have become independent entities because we tax them. Have I read you correctly? Wouldn’t eliminating taxes on them short circuit this? Or are we too far along to go back?

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Carleas, what do you mean by “because we tax them”? Some are behemoths just by the nature of their success. They are huge! I have little interest in the nuts and bolts of such things - I just think that a business that can’t be allowed to fail should be held to different standards than other businesses. They have achieved extraordinary success, to the extent that the government is willing to pump money into them “for the public good”. Therefore, their responsibilities should be greater.

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Sounds right to me, Carleas. I especially like that you’re phrasing your argument in terms of what’s going to practically generate more revenue with less legal entanglement and the real-world impact of actions, without references to obligations, or what’s fair, and so on. It seems to me that the only sticking point is the large number of small businesses that are taxed as individuals. I presume you’d agree with me that any proposed changes shouldn’t increase the burden on them?

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It’s funny when so-called conservatives dispense with the idea of obligations.

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You gotta love the USA. Every year there is a deficit crisis because the government doesn’t have enough revenue to cover its expenses but here is another argument for reducing revenue.

In 2012, the government took $242,289 million in corporate income tax. If that revenue has to be made up by taxing individuals, then each American’s income tax will increase by an average of $773 (based on a total population of 313 million).

In 1955, when America was an industrial powerhouse, the individual to corporate income tax split was 62% individual & 38% corporate. In 2012, it was 82% individual and 18% corporate. Yet the burden on business is still too great. :open_mouth:

taxpolicycenter.org/taxfacts … ?Docid=203

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Anon, I think I misread your earlier post. I read it as saying that taxation creates a false notion of independence, but now I take your point to be that these businesses have gotten so big that they’re a different animal, and if the government is going to bail them out, they should pay taxes back.

To the latter point, I agree that when businesses become “too big to fail”, there does seem to be something relevantly different, but I still don’t know that taxation is the best way to address it. Probably the best way is no to let businesses get that big (e.g. through stricter anti-trust laws), or just let them fail when they fail. But when the government bails out big businesses, they just become large stock holders. Many businesses that would have failed in the most recent recession were bought out by other businesses in a fire sale, and that’s sort of what the government did. Again, I don’t think that is the best policy, but I don’t think the policy justifies taxation. The government gets its returns either as the purchases assets rebound and it sells it off, or as the return as from any government spending: in the form of a better society. The government pumps in money, and in return it gets public good, right?

Uccisore,I cautiously agree that the burden of individually owned businesses shouldn’t increase. To be clear, a lot of individually owned businesses are treated as coextensive with the individual already, and I don’t think their situation would change. If they actually incorporated the businesses, and legitimately kept their personal finances separate from the business’ finances, then they their tax liability wouldn’t change unless the salary they were paying themselves went up (which they should, since their business would be more profitable).

However, given that I’m coming at this from a progressive perspective (and Phyllo, this goes to what you had to say as well), I don’t mean to say that we should reduce revenue. There is reason to believe that eliminating many businesses taxes would result in the same revenue because wages would increase in response. But, if that weren’t the case, I would not oppose increasing taxes on individuals to make up for the shortfall (in a progressive way, of course). My point is not that we should decrease net taxation, but that taxes on individuals are preferable to taxes on businesses.

Phyllo, there’s a distinction between how much money government takes in and where it takes that money from. And the statistics about where the taxes currently come from do not address where they should come from.

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I don’t have a problem with obligations in general. But the idea that rich people actually have an obligation to pay whatever tax rate some politician happens, this week, to think is their ‘fair share’ is a very poorly-defended position, and it wouldn’t serve Carleas’ argument to rely on it. He has a much stronger position by simply arguing for what would actually generate more tax revenue, and what would be more efficient to police.

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Yeah, I think I can agree with all that. The issue of whether or not total revenues should change aside, it seems reasonable that the revenues we generate should come from individuals and not institutions. I didn’t see you touch on this, but I think shifting the burden in such a way would increase our competitiveness in foreign markets too; make us a more appealing place to do business and so on.

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Carleas,

Right, I’m just pointing out a principle. As I said, I’m not really a nuts and bolts kind of guy when it comes to politics. There may very well be better ways than direct taxation to solve the problem I see. Better regulation in the first place, as you suggest, sure sounds logical.

Uccisore,

Efficiency and revenue (and many other things) are what this is about. I’m not talking about obligation as some kind of abstract principle of fairness. For instance, perhaps any project that if it goes wrong could cause environmental damage, would require putting up a surety bond to cover potential cleanup costs - e.g. minesandcommunities.org/article.php?a=319

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No shit. Which is why your ‘oh look a conservative abandoning obligations’ jab was out of place. Environmental concerns are super-neato, but I’m more interested in Carleas’ thread subject in this thread.

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Hey, I’m just trying to play along and be nice. Concentrating on efficiency and revenue while ignoring things like environmental health and social justice are the essence of modern Republicanism masquerading as conservatism. I’m not talking about obligations in the abstract, but I am definitely talking about obligations in the traditional sense. My comment doesn’t seem out of place to me at all.

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Ucci, look at it this way. Why do you think environmental concerns are merely “neato”, while the topic here is economics. Do you really think the two are separable?

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Maybe you could make a thread about that. This one is about shifting of tax burdens from corporations to individuals.

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Cash is fungible. Every dollar coming out of a business through taxes is still, really, coming out of some individual's pocket.  Just in a weirdly abstract, hard to police, difficult to measure way.  The illusion that taxes on a business aren't really taxing people is part of the appeal of business taxes, but it is an illusion.  The 773 figure is pretty irrelevant given that if Carleas' propose changes occur, very little or none of that 'slack' will be picked up by the people who would be paying that average, it would be picked up by the super-rich who are [i]already paying it[/i] in the form of reduced profits to their businesses.
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I tend to think that the middle class would end up paying most of it. The lower income bracket would not see a significant rise in wages and their personal deductions would keep them in the zero or very low tax rate. The very rich have a lot of resources for avoiding taxes which they use now and they will continue to use. On the other hand, the middle income earners have money but not enough to successfully avoid taxation.

It is appealing because when you buy something which has tax imbedded in the price, you actually get something which you want or need and as a result feel that you got value for your dollar. Personal income taxes feel like the government is taking a significant amount of money and delivering little or nothing in exchange.
One could propose that there should only by corporate taxes and no personal income taxes. Prices would be higher but there would be the pleasant illusion that the government is doing lots of things for you for free. :evilfun: