The Republican tax overhaul plans have sparked great uncertainty amid heated debates. This article provides a framework for thinking through the issues.
My sister asked me, “How should we reform taxes, Bill?”
I asked what goal she wanted to achieve.
“OK,” I said, “we can work on fairness. But you’re not concerned about economic growth?”
She said she wanted strong economic growth, too.
If we had been talking about state and local taxes, I would have also mentioned revenue stability — how much revenue falls in a recession and rises in a boom. But for federal taxes, I assume the government can borrow if its revenue declines temporarily. So for federal taxation, I focus on fairness and growth.
Tax fairness is a very confused topic. The shifting of the tax burden blurs impacts on people: The person or company that writes a check to the tax collector may be able to pass the cost on to someone else. We all know that smokers pay more for cigarettes when the tobacco tax is increased. The taxes are paid by the manufacturers and distributors and passed along to the smoker.
Similarly, landlords write a check for property taxes, but we don’t imagine that renters are getting off scot-free. The taxes are passed on to them in higher rents.
So who pays the corporate tax? There have to be real live human beings bearing the burden. Some of them may be shareholders, but some may be the corporation’s workers and consumers of the corporation’s products. And even if you hope that it’s primarily shareholders who bear the burden of the tax, check out your own IRA or 401(k) before you assume that only fat cats are shareholders.
Some estimates are that 70% of the corporate income tax burden is borne by workers through lower wages while 30% is borne by owners of capital — both fat cats and middle-income investors. One liberal group uses 80% burden on owners of capital for long-term effects, but 100% for short-term impacts and 50% for changes in depreciation schedules. Those estimates seem closer to the academic mainstream.
Income taxes are more obviously related to ability to bear the tax burden, but not entirely. Two people work the same job. One takes off to go fishing every chance he gets. The other volunteers for overtime as often as possible. Why should the person who chooses money over leisure time have a greater responsibility to keep the government running than the other person? Why should the teacher with a three-month summer break have a lower responsibility than someone in a 12-month-a-year job? The best answer seems to be that the tax system is imperfect at best.