Toward a Neil Diamond-Free World

Conn Carroll /

The Atlantic’s Megan McArdle looks over Barack Obama’s economic plans and doesn’t like what she sees. Focusing on taxes she writes:

As if those things [trade and labor law] weren’t enough, he wants to raise the capital gains tax. There is a reason that most [countries] tax capital lightly–actually several reasons. The first is that capital is mobile, and the second is that capital means new investment, which gives us shiny new things we like, such as fMRI machines and electric cars and yes, iPhones. Savings represents a tradeoff between current and future consumption. Given that peoples’ time preferences are biased towards the present, we want to make the payoff to deferring consumption as attractive as possible.

Ah, you will say, but corporations actually spend an enormous amount of time structuring their income to avoid taxes, so the rates aren’t that high. But this is an equally big problem. All of that activity is an economic loss–it consumes resources that could be put towards something useful, like erasing all traces of the Neil Diamond box set from the face of the planet.

Worst of all, the corporate income tax and the capital gains tax aren’t really very good at doing what they are supposed to do, which is make sure that the bulk of our income tax burden falls on those who will miss the money the least. Let me posit something which isn’t very controversial among tax professors no matter what their political party: you can’t tax a corporation. That’s because corporations have no feelings, and no assets, of their own. Ultimately, the money always comes from some person: customers, employees, owners, or even suppliers. But the corporate taxes are not targeted by need; they come from whoever the corporation can best squeeze the money out of. The old lady in Dubuque with 100 shares of AT&T pays the same 50% rate on corporate profits as Warren Buffett.

Check out similar Heritage arguments here, here and here.