Why the Progressive Policy on the Corporate Tax Should Be “Repeal and Replace”

As everyone knows, the corporate tax is full of loopholes — so much so that it brings in only a fraction as much revenue as it used to:

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The question is, what to do about it? Progressives often answer that the Treasury should just enforce it more vigorously. That philosophy lies behind the administration’s latest war on inversions — the corporate strategy in which a US company uses a merger with a smaller foreign firm to move its headquarters offshore, thus hiding from the tax man.

But that answer is based on the false premise that the corporate tax is a tax on wealthy corporate shareholders. Not so. In fact, economic research shows most of the economic burden of the corporate tax falls on workers, through lower wages and lost jobs.

How does that work? The key is to understand that corporations as legal entities cannot bear the economic burden of taxes. The true burden must fall on corporate stakeholders — owners of capital (shareholders), customers, or workers. In a globalized world, capital is highly mobile. It migrates to wherever taxes are lower. Customers are located everywhere. That leaves workers, who cannot easily pull up stakes and move to Ireland for a better job, as the ones who bear most of the burden of the corporate tax.

So, if the corporate tax is really a tax on workers, what should progressives do about it? The answer is clear: Repeal and replace. Get rid of the regressive corporate tax and replace it with one that is really a tax on capital. The simplest way to do that would be to tax corporate dividends and capital gains at the full income tax rate instead of the lower rate, as our tax system now does.

Bernie, where are you when we need you? Take up the banner of “repeal and replace the corporate tax.” That will truly differentiate you from your centrist opponent and show that you are the true progressive in the race.

Follow this link for more on the progressive case against the corporate tax.

Written by

Economist, Senior Fellow at Niskanen Center, Yale Ph.D. Interests include environment, health care policy, social safety net, economic freedom.

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