Corporate inversions are a hot topic these days. Every time another U.S. company announces plans to relocate its headquarters overseas, politicians shake their heads and promise action.
But the inversion wave has produced more than earnest intentions and (so far) empty promises. It’s also sparked a debate about the future of the corporate tax itself. Almost everyone agrees on the need for “reform” (although there is nothing approaching a consensus on what that feel-good word might actually mean). And a few brave souls have actually suggested ditching the corporate tax completely.
“Let's repeal the corporate income tax entirely and scale back the personal income tax as well,” suggested Harvard economist N. Gregory Mankiw last month. “We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.”
Repeal is popular in some circles, not all of them conservative. But it’s a non-starter with voters, who seem to like taxing companies. "Americans have a viscerally negative reaction to the notion that large, profitable corporations should pay no tax while they bear the income tax burden," observed University of Michigan law professor Reuven Avi-Yonah in a 2004 article.
Poll data confirm the popularity of the corporate tax. In a recent Gallup survey, 66 percent of those responding agreed that corporations are not paying “their fair share.” Good luck selling repeal to that sort of hostile majority.
Experts dismiss the popularity of the corporate tax as a form of “fiscal illusion” – “the misguided belief that corporations bear the burden of the tax, while every economically literate person knows that taxes can be borne only by natural persons." But Avi-Yonah disagrees:
- Are people really that ignorant? I would argue that the answer is no, and that in fact what people perceive is closer to reality than the economic models of incidence would suggest. The corporate tax is imposed on corporate income, which adds to the economic resources of the corporation. These resources are managed by individual corporate managers, and their control over such resources gives them significant economic, social, and political power. In that sense, imposing a corporate tax that reduces the economic resources available to corporate managers also reduces the power of corporate management. Whatever the economic incidence of the corporate tax, from this perspective its most immediate burden falls on corporate management, and not surprisingly, they are the strongest supporters of corporate tax repeal.
Avi-Yonah has history on his side. In the beginning, the corporate income tax was about power more than money. Or more precisely, it was about regulating the power that comes from money, especially the money controlled by corporate managers.
The corporate tax can be traced to the corporate excise tax of 1909 (which, despite its name, was actually an income tax). That levy is often treated as little more than prologue for the broader income tax enacted in 1913. But that’s only part of the story. As Marjorie E. Kornhauser, a law professor at Tulane, has argued, "An accurate view of the Corporate Excise Tax of 1909 places the tax in an historical context as part of two struggles: the attempt to enact an income tax and the struggle to regulate corporations."
Avi-Yonah agrees, arguing that regulation -- chiefly through the mechanism of publicity -- was a key motive in the creation of the 1909 tax. "The principal vehicle for regulation was the filing of tax returns, which were to be made public," he wrote. "More broadly, the tax itself fulfilled a potential regulatory function -- it could serve as a vehicle to restrict the accumulation of power in the hands of corporate management."
The origins of the corporate tax are highly relevant as we ponder the future of this 20th-century tax in a 21st-century economy. Avi-Yonah, in particular, thinks we should take a lesson from history.
“Corporations are such important actors in any modern economy that the ability to regulate their behavior is crucial to achieving economic goals,” he wrote recently for Politico. “The corporate tax has since its inception been seen as an important vehicle to regulate corporate behavior. The tax can provide disincentives for behavior that Congress deems to be undesirable (e.g., paying bribes or participating in boycotts) and incentives for desirable behavior (investments incentives, hiring incentives, clean energy incentives, etc.).”
Avi-Yonah's conception of the corporate tax is remarkably ambitious -- especially when many politicians seem intent on scaling back the levy and its rates. But so far, the drive for reform (to say nothing of outright repeal) has been stymied by popular enthusiasm for taxing corporations.
That enthusiasm may indeed reflect an imperfect understanding of who actually pays the corporate tax. But as Avi-Yonah points out, it also reflects a clearheaded view of where the power lies in American society.