Ask Auntie Pinko- Corporate Income Taxation Dodge

Ask Auntie Pinko- Corporate Income Taxation Dodge
Ryan- TastyManatees.com

As an interesting side project, I thought I'd take a look at the Democratic Underground's "Ask Auntie Pinko" column. Auntie Pinko serves as a sort of Democratic "Dear Abby", answering questions every week from readers on issues and ideas. Invariably, very complex and interesting ideas are bludgeoned into conformity with the party line, yet sometimes Auntie Pinko presents valid arguments that should be addressed. As an exercise in critical thinking, I will publish a weekly comment on the "Ask Auntie Pinko" column here beginning this week.

This week, a reader asks Auntie Pinko, "My question is this - isn't a corporation merely a tax collector as opposed to a tax payer? It seems to me that all they do is collect money from their working class consumers and transfer it over to the government. Is that really fair?"

Auntie Pinko’s answer cleverly avoids the question's clear intent by engaging in an interesting discussion of double taxation of corporate earnings. In actuality, the reader was asking whether socialists endorsing "progressive" taxation could endorse a "regressive" tax such as the corporate income tax. Here is the way I see this question breaking down.

Progressive taxation demands that higher income citizens be taxed at higher rates than low income citizens, such as through the Federal income tax. This system is mainly based on the concept of the declining marginal utility of money (although there are less significant reasons espoused by truly hardcore socialists) . Declining marginal utility dictates that a poor man subjectively values one dollar more than a rich man, even though the dollar would have bought the same amount of goods or services for either man. Thus, the poor man is hurt more by giving that dollar up than a rich man. Progressive taxation assumes that a rich man might pay ten dollars for every dollar paid by the poor man, and yet both would be contributing their "fair" share. The progressive taxation concept is dear to Auntie Pinko's heart.

However, the fact understood by the reader and avoided by Auntie Pinko is that the corporate income tax is not progressive, but highly regressive. As the reader points out, the corporate income tax makes every corporation a "tax collector as opposed to a tax payer".

Here is why the corporate income tax is regressive, like the sales tax. The sales tax is despised by liberals because it taxes the poor man at the same rate as the rich man (also because it aligns their political interests). Yet the corporate income tax accomplishes the exact same end as the sales tax. As an initial matter, every corporation pays the same income tax rates (depending on profit levels). Since they all pay the same, there are no market substitutes for their goods and services. That is, the consumer can't simply decide to switch to another brand or different type of good just because his favorite's price is increased by 10%. He may stop or decrease his purchasing of the item, but in most cases, the demand outweighs the price increase. Thus, the corporations being taxed all simply raise their prices, and the consumer pays the tax. The corporate income tax is actually a form of sales tax, except the government's take is already worked into the price by the time the customer sees an item on the shelf. It's a "stealth tax".

This point must be emphasized, the corporate income tax is a highly regressive stealth tax. A liberal who truly believed in progressive income taxation of individuals would not support the corporate income tax.

However, the one thing that all government social programs advocated by socialists such as Auntie Pinko require is large amounts of money. The simple fact is that the only way the government can raise the large sums necessary for these social programs is through taxation of some sort. Yet, politicians know that taxation above a certain amount will be rejected by citizens, and raising personal income taxes at all is not good for individual political aspirations. Hence, the corporate income tax was born to tax the rubes without them even knowing it. To add insult to injury, some politicians use the issue of the corporate income tax as a wedge for an "us versus them" mentality in their campaigns, when they know the low-income voters they are trying to appeal to are being regressively taxed.

Note to Readers- I am not the source of this question, nor will I be submitting questions or comments to Auntie Pinko in the future.

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There's a historic precedent:

Pre-med student Stubbins Ffirth (1784–1820) ate, drank, and breathed the blood, urine and vomit of yellow-fever victims (he also dropped the fluids into his eyes and worked them into cuts on his skin).

He didn't get sick—the patients were in a late, uncontagious stage—so he erroneously decided the disease's cause lurked elsewhere.

But they make billions and billions of dollars....! We can't let people starve while they wallow in money. Thats just mean.(/sarcasm){{{{ Lets just ignore the fact that they help keep 99%+ of the population well fed}}}}}

lets start by cutting off all tax goodies for all the hollywood studios and the liberals would love that..no more contributions and the movie stars would get pennies for their work...ilove this idea.

The progressive taxation concept is dear to Auntie Pinko's heart.

I would point out that most of the leading "flat" and "retail sales tax" plans promoted by conservatives and participants here on Free Republic are progressive to at least a small degree. When proposals apply a large standard deduction before calculating taxes due (most flat tax proposals) or provide for a sales tax rebate (some of the NRST proposals), they are, in essence, turning flat taxes into mildly progressive taxes. Frankly, I think that's a good thing and conservatives might have an easier time selling their tax proposals to moderates and liberals if they'd concede this point rather than pretending that "progressive taxation" is unspeakably evil.

I have no problem with acknowledging the declining marginal utility of money. I would say that justice demands that a poor man not be taxed into serious financial difficulty. Most flat tax proposals I have seen (although in rough form) approach this by setting a relatively high level of income above which the flat tax would apply. I agree that a certain extent of progressive taxation is necessary to keep the code from representing an onerous burden.

That said, I think I hit the reason Auntie Pinko was loathe to address the "fairness" of the corporate income tax. She probably made an initial stab at it, realized she would be defending the taxation of working class citizens at the same rate as more wealthy citizens, then hit on the idea of avoiding the subject completely.

Tasty Manatees

Oh, I think your observations were excellent about corporate taxes being passed on to consumers. My point was simply that I don't think that the idea that taxes should be progressive in some way is as bad as many conservatives make it out to seem and I was saying that it might help win support for plans like the flat tax if conservatives would explain that large standard deductions make the "flat tax", especially at the lowest levels, "progressive".

When proposals apply a large standard deduction before calculating taxes due (most flat tax proposals) or provide for a sales tax rebate (some of the NRST proposals), they are, in essence, turning flat taxes into mildly progressive taxes.

Another way this happens is that most of those plans also abolish the inherently regressive payroll taxes. As you say, this is a feature, not a bug.

Another way this happens is that most of those plans also abolish the inherently regressive payroll taxes. As you say, this is a feature, not a bug.

And it frustrates me to no end that conservatives latch on to the "flat" part of the solution which makes it sound like a plan to help the rich when it really helps the poor, too. They key is to keep the flat tax rate near the peak of the Laffer curve and use the standard deduction to allow the tax to be "naturally" progressive at the low end (without artificial brackets that try to define where different social classes begin or end). That can be done either with a flat tax and a deduction or an NRST with a rebate.

Just for the record, I have no problem with tax rates falling below the peak of the Laffer curve if government can learn to live with less. It should simply never exceed that rate. I was describing a revenue maximizing scenario, not the ideal in a broader sense.

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