December 02, 2005

Against Tax Reform

Over in the MaxSpeak comment section, Barkley Rosser is making a bunch of good points about tax reform. For starters, he and commenter Spencer point out that almost 90 percent of the "important" investments in the United States—i.e., buildings, factories, equipment, the stuff that actually makes the country grow—are financed by corporations from retained profits, and not individuals or investors. Doug Henwood has made a similar argument elsewhere, adding that even when firms do turn outside for cash, they go first to banks, then the bond market, and only last to the stock market. Even in the peak year of 2000, IPOs accounted for just 5% of nonresidential fixed investment, and while venture capital does help young firms, it also only provides around 1% of investment.

Blah, blah, blah. At any rate, those numbers seem to imply that repealing the corporate income tax would probably have the greatest effect on investment in this country. I might be fine with that, especially since most companies nowadays seem to waste an inordinate amount of everyone's time either dodging the corporate tax in Bermuda or carving out loopholes in Congress. (Although I shudder to think what idle corporate lobbyists would get up to once they no longer had to meddle with the tax code.) By contrast, higher taxes on personal income or capital gains would probably have relatively little effect on investment.

Of course, Barkley Rosser also points out that since the economic effects of all of these different tweaks are probably vastly exaggerated, the best thing might just be to keep the current system more or less in place**—once enough revenue is raised to close the deficit and pay for spending—and then leave it the hell alone so that people can actually have time to figure out how the system works and then get on with their lives. Good point! I guess it tends to get overlooked that tax accountants and policy wonks have a vested self-interest in constantly fiddling with the tax code in order to make themselves relevant to the world.

(**Mind you, if I was allowed one "tweak," I would exempt the first $10,000 of income from payroll taxes of any sort, and eliminate the "Trust Funds"—which have been squandered on tax cuts anyway—and make Social Security and Medicare pay-as-you-go systems once again. If on the off-chance the system ever faces a shortfall someday, we can raise the cap on the upper end. But... I don't have a magic wand.)
-- Brad Plumer 8:22 PM || ||