August 6, 2014


Hey, conservatives: I'll trade you the corporate tax for a tax on pollution Let's incentivize the right things (John Aziz, 8/06/14, )The Week

My opposition to the corporate tax is a matter of basic incentives. Taxes are, more or less, a tool for the government to achieve public policy, not only in terms of expenditures for public goods, but also in terms of the incentives that those taxes create.

Taxing something disincentivizes it, because it pushes up the cost. The real question is: are corporations something that we should be disincentivizing?

Some would say yes: when a company incorporates, its owners receive a legal benefit in the form of limited liability. If it goes bust, its creditors take control of the corporation and its assets, but they can't go after the assets owned by a corporation's owners. The costs of incorporating, as well as the corporate tax, are payment for that protection.

But, as Pethokoukis points out, that isn't what really happens. The owners of corporations pass as much of those costs as possible onto workers and customers.

And the bigger point, I think, is that if we want to build a society that gives innovators and risk-takers as much opportunity to succeed as possible, limited liability should be as cheap as possible.

If we love the fruits of entrepreneurship -- technological innovation, research, cheaper products and services, and new jobs -- why disincentivize them with a tax? After all, shareholders in corporations (as well as customers and employees) already pay taxes on their income and capital gains. Why burden them with another round of tax?

Well, cutting the corporate tax to zero right now would blow a big hole in the government's finances -- currently 10 percent of the tax base, or the not-so-paltry sum of $280 billion. But there's no reason why that cannot be made up by other taxes on things that we actually want to disincentivize. Like, rather importantly, pollution.

Corporations should be taxed to some degree for the negative side effects they create, like pollution and environmental degradation. But it's not like all corporations are polluting at the same rate. Most firms create far less pollution than the owner of coal-fired power stations, for example. If pollution is the problem, tax the polluters directly for their pollution and environmental degradation. Tax carbon emissions by the ton. That will also have the benefit of further incentivizing the development of clean energy, which is recognized as the best antidote to climate change. Don't tax every corporation at the same rate -- lower the tax rates for those polluting at a much lower rate.

Posted by at August 6, 2014 8:25 PM

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