Kevin Hassett and Aparna Mathur of the American Enterprise Institute have a new paper (pdf!) in which they argue that high corporate taxes depress manufacturing wages. NYU law professor Daniel Shaviro allows that they might be right (although they might not) but then asks a crucial question:
What to do with the corporate tax if labor bears it is less clear. One can’t just repeal it, as in the context of an income tax it is a vital back-up to imposing the tax on individuals. Repeal the corporate tax while still taxing individuals on their income, and people will do tax planning games so their earnings disappear and pop up again, tax-free in the putatively corporate sector. Switching to consumption taxation might eliminate this problem and even permit continued progressivity (so long as individuals remain relatively immobile) but that doesn’t seem likely to happen.
I’m willing to at least entertain the argument that taxing capital less than labor is a good thing. But if you try to do that within the existing income tax structure, you’re incentivizing people (like, say, partners in private equity firms) to game the system and pretend that their income is really a capital gain. The only way around this is to move to a genuine consumption tax (like, say, the Fair Tax). But that comes with a bunch of problems of its own and is, as Shaviro notes, receding as a political possibility. Then there’s 1986-style tax reform, where you subject all kinds of income to the same rate, but try to keep that rate as low as you can. Which still seems like a pretty reasonable idea to me, although nobody in Washington or on the campaign trail is pushing it these days.
Update: A reader named Chuck, who has been struggling vainly with the unfriendly commenter sign-in procedure, e-mails:
[I]n regard to “The only way around this is to move to a genuine consumption tax (like, say, the Fair Tax).” One wonders if strengthening collective bargaining could have an impact on labor wages?