Over at the economix part of the New York Times, Bruce Bartlett has a nice piece explaining that it’s shareholders and labor who shoulder increases in corporate taxes, not consumers.

Who Pays the Corporate Income Tax

By BRUCE BARTLETT

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

The United States has had a corporate income tax since 1909, but in all the years since there is a major question about it that economists haven’t been able to answer satisfactorily: who pays it? The possibility that Congress may act on corporate tax reform this year makes this a highly salient question.

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The problem, of course, is that people must ultimately pay all taxes. Corporations, contrary to the views of some Republicans, are not people. They are legal entities that exist only because governments permit them to and are artificial vehicles through which sales, wages and profits flow. Hence, the actual burden of the corporate tax may fall on any of the groups that receive such flows; namely, customers, workers and shareholders, the ultimate owners of the corporation.

Probably most people assume that the corporate income tax is largely paid by consumers of its products or services. That is, they assume that although the tax is nominally levied on the corporation as a whole, in fact the burden of the tax is shifted onto customers in the form of higher prices.

All economists reject that idea. They point out that prices are set by market forces and the suppliers of goods and services aren’t only C-corporations, which pay taxes on the corporate tax schedule, but also sole proprietorships, partnerships and S-corporations that are taxed under the individual income tax. Other suppliers include foreign corporations and nonprofits.

Therefore, corporations cannot raise prices to compensate for the corporate income tax because they will be undercut by businesses to which the tax does not apply. It should also be noted that the states have substantially different corporate tax regimes, including some that do not tax corporations at all, and we do not observe that prices for goods and services vary from state to state depending on its taxation of corporations.

That leaves two remaining groups that may bear the burden of the corporate tax: workers and shareholders.

In 1962, the University of Chicago economist Arnold C. Harberger, published an important article arguing that the corporate tax was borne entirely by shareholders. This was unquestionably true in the first instance; that is, when the corporate income tax was first imposed. The tax simply reduced corporate profits and had to come out of the pockets of shareholders, given that it could not be shifted onto consumers.

But as time went by, some economists argued that a substantial portion of the corporate income tax was ultimately paid by workers in the form of lower wages. This resulted because the supply of capital would shrink in order to raise the rate of return on capital. A smaller capital stock would reduce the productivity of labor and cause real wages to be lower in the long run.

Most economists now agree that the burden of the corporate income tax falls on labor to some extent, but there is disagreement over the degree. This is important because the political prospects for cutting the statutory corporate tax rate, a goal shared by all tax reformers, may depend on the extent to which it can be shown that workers will benefit.

The just-published March 2013 issue of The National Tax Journal, the principal academic journal devoted to tax analysis, contains four articles by top scholars who have sought to clarify the incidence of the corporate income tax. Unfortunately, there is no consensus.

The first article, by a Reed College economist, Kimberly Clausing, supports the traditional idea that capital bears all of the corporate tax. She notes that large multinational corporations have a great deal of flexibility in determining where to locate production, incur costs and realize profits.

A company may borrow in one country and take the deduction for interest there, locate actual production facilities and employ workers in another country, and realize profits in a third country by transferring intellectual property such as patents there or by adjusting prices on internal sales among its foreign subsidiaries.

Moreover, Professor Clausing notes, corporate shareholders may live in many different countries, each facing a different tax regime with respect to the taxation of dividends and capital gains.

For these reasons, she argues that it is impossible for workers to bear any significant portion of the corporate tax in the form of lower wages. It all falls on capital. A second article, by Jennifer Gravelle, a Congressional Budget Office economist, agrees with this conclusion.

But a third article, by an Oxford University economist, Li Liu and a Rutgers economist, Rosanne Altshuler, argues in favor of the idea that labor bears most of the burden of the corporate tax.

They take advantage of the fact that different industries bear different tax burdens because of various provisions of the tax law, and also that concentration and competition varies among industries. They empirically examine wages among industries and conclude that labor bears about 60 percent of the corporate tax burden.

That is, a $1 increase in corporate taxes will reduce wages by about 60 cents.

Finally, four Treasury Department economists detail the method the Treasury uses to allocate the corporate tax in distribution tables. They have the advantage of access to actual corporate tax returns and far greater detail on corporate finances than available to private researchers.

The Treasury economists conclude that 82 percent of the corporate tax falls on capital and 18 percent on labor. This is very close to the methodology of the private Tax Policy Center, whose analyses are frequently cited in policy debates. It assumes that 80 percent of the corporate tax is borne by capital and 20 percent by labor.

Of course, all of these assumptions may be called into question when dealing with any specific tax reform proposal. For example, a change in depreciation allowances is mainly going to affect manufacturing companies, whereas a change in the taxes on foreign-source income will have an impact only on multinationals.

To build support for or opposition to particular changes in corporate taxation, many claims will be made about the constituencies that will benefit or be harmed. People should be aware that even the best academic economists disagree on the basics of who actually pays the corporate tax.

Just saying.  Not only is Capital Gains taxed at the low rate of 15% compared to the top wage tax rate of 35%, but these gains are free of payroll taxes and taxes that pay for Medicare and Medicaid.

Nice being wealthy hey?  From an article by Bruce Bartlett, former top advisor to people like Ron Paul and President Ronald Reagan.

Significantly, much of Mr. Romney’s capital gains income achieved this treatment through a special tax loophole called carried interest. According to recently released documents, executives at Bain Capital, where Mr. Romney made the bulk of his estimated $250 million fortune, saved $200 million in federal income taxes and another $20 million in Medicare taxes because of the carried interest loophole…..

As long as a taxpayer decides when or if to realize gains for tax purposes, that is a very valuable loophole even if gains are taxed at the same rate as ordinary income. For one thing, a taxpayer can easily match gains with losses to avoid having net taxable gains. And, of course, capital gains would still avoid the 15.3 percent payroll tax, which applies only to wage income……

Beezer here.  No wonder the wealthy continue to amass more and more of the nation’s income.  They don’t have to pay taxes at the same rates most Americans pay.  We’ll never get out from under deficits and debt with the existing tax system.  To say it needs a major overhaul and simplification is a no brainer.  

From economist Bruce Bartlett, a former top advisor to Presidents Ronald Reagan and George W. Bush, in a Fiscal Times piece.

Lately, there has been some controversy about the growth of spending under
Barack Obama. It began on May 22 with a column by Rex Nutting of MarketWatch, which concluded that the rate of
growth of federal spending under Obama has actually been trivial compared to the
last 4 presidents.

According to Nutting’s calculations, spending has grown only 1.4 percent per
year under Obama – one-fifth the rate under Ronald Reagan and George W. Bush.
Following is a chart accompanying the article.

There has been a considerable amount of debate
about Nutting’s calculations, which fly in the face of Republican dogma. Much
involves technical accounting issues, such as how to allocate spending during
fiscal year 2009. This is important because fiscal year 2009 began on September
1, 2008 during Bush’s administration, reflecting his priorities. By the time
Obama took office on January 20, 2009 the fiscal year was almost half over; he
didn’t submit his first budget until February 26, 2009 and the fiscal year 2010
budget is really the first one that reflected his priorities.

Nutting assigned the bulk of fiscal year 2009 spending to Bush, an assumption
that other analysts have questioned. Glenn Kessler of the Washington Post found
that Nutting overstated his argument in various ways. But the PoliFact site
of the Tampa Bay Times concluded that the Nutting column was
essentially correct.

Aside from the political implications, the reason this debate is important is
because there is a tendency for people to conflate spending, deficits and debt,
as well as confusing rates of change with absolute levels.

The difference between fiscal years 2008 and 2009 is very significant because
the economic crisis hit hard late in calendar year 2008 and early 2009 – just as
Bush was leaving office and Obama was coming in. According to the Congressional
Budget Office, spending shot up from 20.7 percent of the gross domestic product
in fiscal year 2008 to 25 percent in 2009 – an extraordinarily large increase.

When looking at the rate of change of spending, the base year is critically
important; the higher spending is in the base year, the smaller subsequent
increases will appear. If the base year is lower, subsequent increases will be
larger in percentage terms.

Thus if we compare CBO’s latest estimate for spending in 2012 to 2008 we get
a total increase of 21.7 percent, but if we compare it to 2009 the increase is
just 3.1 percent.
I don’t want to get into the nitty-gritty of whether to
allocate all spending in fiscal year 2009 to Bush or Obama. I just want to note
that the president has very little control over the budget one way or another;
the vast bulk of spending is baked in the cake the day he takes office and
changes can only be made incrementally and over time.

This fact is illustrated by looking at CBO’s last spending projection of the
Bush administration, which was issued on January 8, 2009 – 2 weeks before Obama
took office and containing no Obama initiatives. It shows that spending was projected to
rise to 24.9 percent of GDP in 2009 under laws that Obama inherited – almost
exactly what it ended up being.

Moreover, CBO data show that the biggest increase in spending between 2008
and 2009 was for mandatory programs such as Medicare and Social Security that
are not appropriated by Congress annually, but continue automatically unless the
underlying law governing beneficiaries is changed. This portion of the budget
rose from 12.4 percent of GDP in 2008 to 16.4 percent in 2009. By contrast, the
discretionary portion of the budget, which is appropriated annually and includes
national defense, rose from 7.9 percent of GDP to 8.9 percent between 2008 and
2009.

Another thing that is clear from the CBO data is that the budget deficit is
as much the result of lower taxes as higher spending. Revenues fell from 17.5
percent of GDP in fiscal year 2008 to 14.9 percent in 2009 and 2010, rising to
just 15.4 percent in 2011 and 15.8 percent this year. Had revenues stayed at
their 2008 level, combined federal deficits would have been $1.3 trillion
smaller since 2008.

And this estimate actually understates the extent to which Bush’s policies
devastated the government’s revenue-raising capacity. In the postwar era,
federal revenues have averaged 18.5 percent of GDP. They averaged 18.2 percent
during Ronald Reagan’s 8 years and 19 percent under Bill Clinton’s 8 years, but
17.6 percent during George W. Bush’s 8 years and just 15.2 percent for Obama’s 4
years thus far.

At a minimum, this puts a lie to the ideas that we are overtaxed, that Obama
has raised taxes, or that low taxes stimulate growth. Indeed, based on history,
one can easily argue the opposite – that high taxes stimulate growth. The
expansions of both the Reagan and Clinton administrations were preceded by big
tax increases in 1982 and 1993, and revenues as a share of GDP were considerably
higher during their administrations than under either Bush or Obama.

It’s an old political trick to blame the other side for things that your side
is actually responsible for. I remember clearly that Democrats often attacked
Reagan for economic conditions and policies that really belonged to Jimmy
Carter. Today, Republicans are blaming Obama for those that rightfully should be
attributed in large part to Bush.

It is not as if Obama is unaware of what Republicans are doing. He called
them out on it in a December 8, 2009 speech. Republicans, Obama said,
passed tax cuts and expansive entitlement programs without paying for any of it — even as health
care costs kept rising, year after year.  As a result, the deficit had reached
$1.3 trillion when we walked into the White House.  And I’d note:  These
budget-busting tax cuts and spending programs were approved by many of the same
people who are now waxing political about fiscal responsibility, while opposing
our efforts to reduce deficits by getting health care costs under control.  It’s
a sight to see.

Obama was right about Republican hypocrisy, but he has seldom made this point
since, allowing Republicans to dominate the debate on budget issues and
attribute to themselves an undeserved record of fiscal responsibility. If he
hopes to win in November, Obama needs to remind voters that Bush and his party
are largely responsible for the budget deficit. He will find a receptive
audience; the New York Times/CBS News poll has consistently found that Americans blame Bush by a 3 to 1 margin over Obama. In January
of this year, 43 percent of them held Bush responsible and only 14 percent blamed Obama.

From a recent column by economist Bruce Bartlett, former advisor to Presidents Ronald Read and George W. Bush, as well as staffer for Representatives Ron Paul and the late Jack Kemp.  In other words, a rock ribbed Republican.

Beezer here.  The important columns in this chart are the last two.  The next to last column measures what’s known as the ‘tax wedge.’   The tax wedge is the difference between the cost to an employer of employing a worker and the after-tax reward that the employee receives.   This is the underlying principle Republicans espouse to claim that lowering taxes (the cost to the employer) will result in more hiring.

As one can see, the United States is a low-tax country with a total tax wedge of 29.5 percent. Three-fourths of O.E.C.D. countries have a larger tax wedge on average workers.

I have also included the latest data on the percentage of workers employed as a share of the working-age population. I think this is a better measure of the health of the labor market than the unemployment rate, which goes up and down for a variety of reasons unconnected to taxes.

Here, too, there is little evidence that taxes affect employment one way or another. Almost half of the countries with a bigger tax wedge employ a larger percentage of their working-age populations than the United States does, and more than half of those with a smaller tax wedge have lower employment ratios.

One problem with the tax-wedge theory is that taxes are at a historical low as a share of the gross domestic product. According to the Congressional Budget Office, federal revenues will be 15.8 percent of G.D.P. this year. The postwar average is about 18.5 percent, and taxes averaged 18.2 percent during the Reagan administration; indeed, at their lowest point in 1984, federal revenues were 1.5 percent of G.D.P. higher than they are now.

Another problem is that there hasn’t been a significant tax increase affecting average working people since 1983, when Reagan raised the payroll tax rate to 15.3 percent from 13.4 percent (employer plus employee). Contrary to popular belief among Republicans, there have been no significant tax increases during the Obama administration. In fact, there have been tax cuts aimed directly at workers.

The making-work-pay tax credit consumed some 40 percent of the budgetary cost of the 2009 stimulus package and reduced taxes for every person or household with a positive income-tax liability and an income below $75,000 in 2009 and 2010. In 2011 and 2012, the making-work-pay credit was replaced by a temporary 2 percent cut in the payroll tax rate, reducing taxes for every worker.

The reason that unemployment is high clearly has nothing to do with taxes. Consequently, there is no reason to think that reducing taxes further will do anything to raise employment by reducing the tax wedge.

Beezer again.  We’ve long maintained that reasonably progressive taxes have little or nothing to do with robust economies, they just help pay the bills.   Strong economies are created by dynamics much more important than reasonable taxes.  Things like innovation, strong educational institutions, robust infrastructures and solid research and development investment are far more important.  Robust economies are also most often characterized by high employment rates.  Which is why the number one job of Congress today should be to guarantee job growth.  We have the labor, we have trillions of dollars worth of infrastructure projects already identified, and the rest of the world is literally paying us to take their savings.  That we haven’t already begun hiring millions of people to go back to work this way is criminal.   

An  interesting article is in yesterday’s Economix section of the New York Times.  It features an interview with Bruce Bartlett, who was a senior staff member for Presidents Ronald Reagan and George H.W. Bush, following stints as a staff member for Rep. Jack Kemp and Rep. Ron Paul.  Bartlett, in other words, has a bullet proof conservative pedigree.

Bartlett now thinks the modern version of Republican economic policy amounts to voodoo economics, and in this interview says modern Republicans aren’t even informed about where the ideas came from, and why.

In his (1974) conference paper, Professor Mundell first articulated what came to be called “supply-side economics.” He said the mainstream economic view, based on the theories of John Maynard Keynes, was all wrong. Keynesians advocated easy money to stimulate growth and a tight fiscal policy to fight inflation.

This was the exact opposite of what was necessary, Professor Mundell said. He advocated a tight money policy to fight inflation and tax-rate reductions to stimulate growth.

Mr. (Jude) Wanniski wrote a commentary, “It’s Time to Cut Taxes,” about Professor Mundell’s view that was published in The Wall Street Journal on Dec. 11, 1974. He wrote a much longer description of supply-side economics, “The Mundell-Laffer Hypothesis — A New View of the World,” that was published in the spring 1975 issue of The Public Interest, an academic journal edited by Irving Kristol.

Mr. Wanniski’s most important contribution to the emerging supply-side philosophy, however, was his “Two-Santas” article, published in The National Observer on March 6, 1976. The Observer was a weekly published by Dow Jones that folded in 1977; consequently, it has been pretty much forgotten. (The article doesn’t even appear among the archives of Mr. Wanniski’s work at the Polyconomics Web site; I retyped it myself from a reprint Jack Kemp used to hand out when I worked for him, and I posted it here.)

The essence of the Wanniski argument was that each political party needed to be a different sort of Santa Claus. The Democrats were the spending Santa Claus, promising more government benefits. The Republicans should be the tax-cut Santa Claus, he said….

Although the budget deficit rose to 6 percent of gross domestic product in 1983 from 2.7 percent in 1980, Reagan easily won re-election in 1984. This further convinced Republicans that the deficit was a losing issue and only tax cuts mattered for political success.

The final straw was George H.W. Bush’s support for a tax increase in 1990 to reduce the deficit, which many Republicans say sealed his defeat in 1992 by Bill Clinton.

Since then, fealty to tax cuts and lip service to deficits has become Republican dogma.

Among its enforcers is Grover Norquist of Americans for Tax Reform, which makes support for tax cuts and opposition to tax increases a litmus test for all Republicans…..

I worked for Mr. Wanniski in the mid-1980s and know that he wasn’t obsessive about never raising taxes. He wanted economic growth and thought tax-rate reductions were the best way to achieve it, at least in the 1970s. But if higher taxes would raise growth, then he would support them. As he explained in an e-mail to Ben Bernanke, at the time the chairman of the president’s Council of Economic Advisers, on Aug. 11, 2005 (on which I was copied):

I for one am always ready to listen to arguments for higher taxes, more regulation and restraints on free markets, as I might be persuaded that under certain circumstances they would “invite,” not “stimulate” (a Keynesian idea), long-term growth. I’m not “anti-government,” in other words. (The Grover Norquist idea of opposing all tax increases is dumb, and Grover knows I believe that.)

Beezer here.  The idea that tax cuts can increase demand, or shore up flagging demand during a recession, is not much questioned by economists of all stripes.  But the idea that tax cuts are always necessary, or even helpful in every situation, is very much in doubt.  Corollary assertions, such as the one that tax cuts always pay for themselves, are almost completely discredited today.  President Obama and Congress quickly cut taxes and retained the Bush tax cuts in order to fight the Great Recession.  But now Republicans are shouting about deficits–even though the tax cuts are a major cause of those same deficits.  My take is it’s a mistake to assume people in leadership, public or private, always know what they are talking about. 

Make no mistake, the Bush tax cuts, and the series of tax cuts piled on since the economy plunged into deep recession beginning in 2007, are the primary cause of deficits and a major contributor to projected long term debt.

From an article by Bruce Bartlett, top economic advisor to former President Ronald Reagan among other leading conservative Republicans at the time.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Much is made of spending projections for Medicare, Medicaid and Social Security but it’s seldom mentioned that even those rising costs could be covered if Congress rolled back it’s tax cutting frenzy of the past 12 years.

Tax collections could keep pace with those costs if Congress permitted the George W. Bush tax cuts to expire on schedule in 2012 and allowed the alternative minimum tax to hit millions of additional households, the CBO said. But under current tax policies, the CBO said, tax collections would barely cover the cost of the health and retirement programs alone by 2035.

Economics professor Robert Reich, former Secretary of Labor under President Bill Clinton, nails down how the solve our long term budget debt.

 

Stop the Austerity Train Wreck! 

The biggest question right now on Planet Washington is whether the congressional supercommittee will reach an agreement.

That’s the wrong question. Agreement or not, Washington is  on the road to making budget cuts that will slow the economy, increase unemployment, and impose additional hardship on millions of Americans.  

The real question is how to stop this austerity train wreck, and substitute the following: 

FIRST: no cuts before jobs are back – until unemployment is down to 5 percent. Until then, the economy needs a boost, not a cut. Consumers – whose spending is 70 percent of the economy – don’t have the money to boost the economy on their own. Their pay is dropping and they’re losing jobs.  

SECOND: Make the boost big enough. 14 million Americans are out of work, and 10 million are working part time who need full-time jobs. The President’s proposed jobs program is a start but it’s tiny relative to what needs to be done. It would create fewer than 2 million jobs. We need a big jobs program – rebuilding America’s crumbling infrastructure, and including a WPA and Civilian Conservation Corps.

THIRD: To pay for this, raise taxes on the super-rich. It’s only fair. Never before has so much income and wealth been concentrated at the very top, and taxes on the top so low. Go back to the 70 percent marginal tax we had before 1980. And include more tax brackets at the top. It doesn’t make sense that any income over $375,000 is taxed at the same 35 percent, even if it’s a billion dollars. And tax all sources of income at the same rate, including capital gains.  

FOURTH: Cut the budget where the real bloat is. Military spending and corporate welfare. End weapons systems that don’t work and stop wars we shouldn’t be fighting to begin with, and we save over $300 billion a year. Cut corporate welfare – subsidies and special tax breaks going to big agribusiness, big oil, big pharma, and big insurance – and we save another $100 billion.

Do you hear me, Washington? Do these four things and restore jobs and prosperity. Fail to do these, and you’ll make things much, much worse.

Beezer here.  The problem is that the GOP is totally owned by those in the top 1% of the income pyramid.  The nation’s wealthiest families use the GOP as a tool to protect their corporate subsidies and the tax breaks available only to the wealthy.  So far their influence in Congress has managed to control the national discussion of what to do, concentrating this discussion mainly on cutting federal programs that benefits the non-wealthy such as Medicare, Social Security and Medicaid instead of rolling back a dozen years of piling tax cut upon tax cut that have almost entirely further enriched the already wealthy.  The GOP promotes austerity programs for everyone but their 1% benefactors, even as poll after poll shows that the majority of citizens understand tax cuts are a huge part of the problem.  The GOP ignores these polls because they don’t represent the majority of Americans.  They represent a very small slice of America, the 1% who own them and to whom they owe their allegiance.  We don’t think this allegiance will survive the 2012 elections because the austerity is already being felt by the majority at the municipal level.  Services are being drastically cut at this level, not to mention the GOP proposals to extend cuts even further.   Congressional approval levels are in the single digits, below those for British Petroleum during the Gulf Oil spill disaster.   Obama’s levels are below 50%, but even at those levels the President’s approval rating is four times that for Congress.   Occupy Wall Street protests bring nothing but derision from GOP politicians, who portray the participants as nothing but unemployed malcontents who want to destroy Capitalism.  They are wrong.  Many of the participants are employed.  And many of those who are not employed are college graduates who face huge tuition debts they cannot pay back without jobs.  These young adults have parents.  The GOP response for them to ‘suck it up’ while the wealthiest 1% rake in all the income is not going to fly politically, in our opinion.  Obama appears finally to understand the overall situation and is relentlessly pressing for passage of a jobs act in the face of GOP opposition.  He should not only continue but he should up the ante by increasing the size of the jobs act.    Hiring directly to rebuild America’s crumbling infrastructure is the single policy that will begin economic recovery.  When the GOP controlled Congress balks, he should  portray Congress as a ‘do nothing’ Congress as did Truman after WWII.   Let the tax cuts expire, the money is being hoarded.  It isn’t being invested and not enough is being spent on consumption because GOP tax cut politics have starved the 99% so much they can no longer consume enough to support Main Street businesses.  Reich is correct.  If the GOP is not stopped, the nation is in for a real train wreck.