What is the incidence of the corporate income tax?

Emmanuel Saez and Gabriel Zucman seem to think the correct answer is to assume that there is no substitution away from capital or from the corporate sector:

This paper proposes a new way to do distributional tax incidence better connected with tax theory. It is crucial to distinguish current distributional analysis from tax reform distributional analysis. Current distributional analysis shows the current tax burden by income groups and should assign taxes on each economic factor without including behavioral responses: taxes on labor should fall on labor earners, taxes on capital on the corresponding asset owners, and taxes on consumption on consumers. This allows to distribute both pre-tax and post-tax current incomes and measure the economically relevant tax wedges on each factor without having to specify behavioral responses. Tax reform distributional analysis shows the impact of a tax reform and should describe the effect on pre-tax incomes, post-tax incomes, and taxes paid by income group separately and factoring in potential behavioral responses. Various scenarios can be considered given the uncertainty in behavioral responses. We illustrate our methodology using a simple neo-classical model of labor and capital taxation.

No Western fiscal authority I have heard of thinks of tax incidence in these terms.

There is an argument that you first write down the “no-response” burden in order to arrive at the actual estimated burden, as the authors seem to note.  That is not an argument for coming up with a “no adjustment” estimate and marketing it to The New York Times (and others?) as correct and based on normal assumptions, without first adjusting for incentives and capital responses and shifts in the ultimate tax burden.  Would we have known about these underlying assumptions — which lie behind their subsequent calculation of wealth inequality — at all, if not for the tireless work of Phil Magness and Wojtek Kopczuk on Twitter?

Returning to the paper, it has some quite weak sentences, such as: “But it [no adjustment] also has the advantage of not being dependent on assumptions on behavioral responses.”

You might as well argue that assuming zero price elasticity of demand “has the advantage of not being dependent on assumptions on behavioral responses.”  In reality, one is assuming about the least plausible behavioral response possible.

Here is some background material from Wojtek Kopczuk, which works through how the proffered inequality measures and corporate tax assumptions are related.  And from Steven Hamilton.  Here is also the recent David Splinter summary analysis on tax progressivity.  Wojtek notes in his Twitter thread:

The bottom line: corporate tax should be felt by other forms of capital. That’s the standard assumption. CBO makes it, Auten-Splinter make it, Piketty-Saez-Zucman make it. Who does not? Saez-Zucman (2019) do not.

Here is the semantic innovation from the Saez-Zucman paper:

We think it is more useful to say that cutting corporate taxes could increase workers’ wages rather than say
that the tax burden on workers would fall.

Say both!  Here are two well-known and also generally accepted AER papers suggesting that the corporate income tax places a burden on real wages.

Michael Smart agrees with me on the new Saez-Zucman piece:

Zucman has now kindly posted an early working paper to support the SZ assumption. I do not find this WP convincing. We’re simply told that the “natural description” of tax incidence is its legal incidence, i.e. 100% shareholder incidence of CIT.

I find this episode appalling, and I hope The New York Times is properly upset at having been “had.”

#TheGreatForgetting

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"No Western fiscal authority I have heard of thinks of tax incidence in these terms."

But what about in eastern communes?

This is really simple: Tax (punish) what you want less of and subsidize what you want more of. We tax housing and job creators and subsidize poverty and homelessness. We are rewarded with great success.

If I steal a hundred million dollars and then hire 50 workers at $12/he does that make me a "job creator"?

If you're insinuating that the American system of commerce encourages and/or forgives acts of fraud or theft so long as jobs are created, I will remind you that Bernie Madoff is in jail for the remainder of his life.

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That is a non sequitur. No one is talking about stealing. Well... In a way we are because most taxes are theft but I'm guessing that was not the stealing you meant.

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'suggesting that the corporate income tax places a burden on real wages'

Well, that undoubtedly explains why the Bahamas or Bahrain are such worker's paradises, with a 0% corporate tax rate.

Of course what is missing is any discussion of how the revenues are used in investments that support workers' real wages: education, public health & safety, roads, etc.

Economists that only look at one side of the ledger are always going to miss most of the story.

That's obviously because they don't believe positive government contributions to personal welfare are possible. Just like the "models" of behavioural response to taxes don't believe it's possible for the "job creators" to control government policy making, to steal from their employees, or to commit large-scale fraud.

My college econ professors earnestly lectured this laughable idea: "Due to trade, the original allocation of resources within an economy is irrelevant to economic outcome."

"Due to culture, the original allocation of resources within an economy is irrelevant to economic outcome."

Fixed.

That's facetious and not entirely true, but still better than the original statement.

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If wonks were any good at predicting human behavior, they'd make billions at some startup.

+1

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Their job isn't actually to predict anything, it's to give policy makers political cover for endlessly cutting taxes on rich people. Putting all the embarrassingly inaccurate descriptions of the real world behavior of CEOs to one side--any policy, like a wealth tax, that unites rank and file Republicans and Democrats against the oligarchy is prima facie moving in the right direction.

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Modern taxation literature relies on so many beyond-absurd assumptions that I'm almost inclined to believe the whole thing is a conspiracy to undermine our profession.

This episode is still better than the uproarious 70% optimal MTR claims that thankfully have died down a bit.

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Rule of thumb nr.1: if you are discussing about Public Economics and you think you you know more than Saez, take your time to review your argument and spot your mistake!

Of course, it is explained in the paper that:

"This is different from just following statutory incidence. For example, both employer and employee payroll taxes are a tax on labor and hence on workers. This analysis obviously does not provide any information on the behavioral responses to taxes and hence about any indirect effect of current taxes. But it also has the advantage of not being dependent on assumptions on behavioral responses. For example, the corporate tax is a tax on shareholders and hence on the use of capital in the corporate sector exactly as written in the Harberger (1962) model. The corporate tax possibly reduces wages of workers but any such reduction in wages is obviously factored in the current pre-tax incomes of workers."

It's just enough to go beyond the introduction, to understand that actually they are doing something sensible. For instance, in section 2:

"How should we describe such an economy and represent it in a current distributional table? wL is obviously labor income and rK is capital income in the economy as would be measured in national accounts. While it is true that τK affects w negatively, w is the actual pre-tax wage rate in the economy. Similarly, τK affects r positively, but the actual pre-tax rate of return is r and not the lower r∗. Hence, in this case, the natural description of the pre-tax and post-tax incomes, and tax paid is the following: pre-tax labor income is wL, post-tax labor income is ¯w = w(1 − τL)L, workers pay τLwL in taxes. Pre-tax capital income is rK, post-tax capital income is ¯rK = r(1 − τK)K, and capitalists pay τKrK in taxes. Naturally, this description of incomes and taxes is silent on how taxes affect the economy. It is important to emphasize that our assumption is more than “accounting” because it respects the relevant economic incentives of producers and individuals. In our economy, w and r are indeed the relevant prices for production decisions. ¯w and ¯r are indeed the relevant prices for supply decisions. We define taxes as the wedges between this production and supply prices. We will see below indeed that optimal tax analysis is about determining these tax wedges τL and τK. Contrast this with actual distributional tax analysis. Actual distributional analysis would ignore the deadweight burden and consider that capital taxes rτKK = (r − r¯)K are shared by capitalists who pay (r∗ − r¯)K and by workers who pay (r − r∗)K. Pre-tax income of workers is wL+(r−r∗)K and pre-tax income of capitalists is rK+(r∗−r¯)K = (r∗−τKr)K. These concept are neither the actual incomes going to workers and capitalists pre-tax nor the incomes that would go to workers and capitalists absent taxes (as the change in K and deadweight burden are ignored). This might be an defensible assumption for small taxes (where deadweight burden is second order), in practice, actual taxes are large. Of course, if the supply of capital is inelastic, then there is no deadweight burden and no change in K and hence the actual analysis boils down to the analysis we propose. However, if the supply of capital is perfectly elastic, then the capital tax is borne fully by labor and would be equivalent to a tax on inelastic labor, even though the two taxes have drastically different efficiency implications."

So what they are saying actually makes a lot of sense as long as you think that the uncompensated cross-price of elasticity of labour wrt to r and capital wrt to w is zero (or small enough). At the end of the day, if you think that corporate taxes have a large effect on labour supply - unless you believe in some RBC model where people adjust dramatically their labour supply to smooth consumption - most of the effect should come through a reduction (increase) in the real rate of return and an increase (decrease) in K.

Corporate vs. non-corporate sector alone invalidates that point.

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"...obviously... obviously... obviously... the natural description... Naturally... indeed... indeed... indeed... Of course."

Welp. I'm convinced.

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"So what they are saying actually makes a lot of sense as long as you think that the uncompensated cross-price of elasticity of labour wrt to r and capital wrt to w is zero (or small enough)." I think we can look at the increased usage of automated kiosk at fast food restaurants as evidence that the cross-price elasticity of capital wrt w is not zero (or small enough... whatever that means).

So, tax capital to preserve jobs. We tax jobs.

Jobs are a cost, not a benefit. But, tax consumption.

Why consumption when there are people who spend all they earn, and are still poor; and there are wealthy folks who consume disproportionately less. Did you mean to say: Tax Wealth?

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Tangent: what is zero is the effort I put into that kiosk, after being redirected away from the counter, in my only encounter with it, because there was a nice young lady stationed next to it. After barely glancing at the screen, to pretend that I was using it in good faith, I made a wild stabbing motion at it and waited about five seconds before saying, as she knew I must, "It's not working." She then took my place at the kiosk and ordered my coffee for me. Initially, at least, she was probably doing that all day.

But I walk in a McD's about once a year. I don't imagine the girl will be needed to stand by the kiosk forever. The kids and maybe soon even the regulars among the oldsters will have no trouble with it, I'm sure. Maybe it will make things move more smoothly, possibly not.

I've never worked at a McD's so I don't know how it's organized. I would hope everyone takes turns doing the different tasks? I think, if so, then I would like the break from making burgers or fries, to be one of the order-takers - of which there are going to be fewer now? - for awhile. But then your read how they're testing robot-fryers. Maybe that would mean people might have to hustle a little less. But: is it fun to talk to a robot co-worker, to make the day go by more pleasantly?

When I returned to the car with my coffee and told my husband about the then-novelty of the kiosk, and explained that I had gone through the charade of using it, and made some cliched remark about automation, he - who actually eats in fast food places, especially on the road, and thus has some perhaps-earned opinions about their operations, an unshakeable belief that the quality of their food has changed over the years, and that there is great variation in quality among them, even within chains, the way you foodies might about your hip cafes or taco trucks - said something rather mean about how the employees are sometimes going through the charade of working.

But I think even he would agree that a place where the employees were happy, and not overly-stressed, would likely provide the customer with the best experience.

You write well, peri.

I worked for a McDonald's competitor in my youth. Back then, we needed two employees at the counter at minimum, and more like four or five during peak hours. (Incidentally, no, the staff up front never takes a turn at being a burger cook; but the cooks in the back do get to take turns manning the grill, or the fryer, or wrapping the food, or doing the worst job of all, which is dishes.) I think the robo-kiosks reduce employees at the margins. I was at a McDonald's the other day, and there was only one person at the counter. Really, she was splitting her time between the counter and the drive-through. We ordered from the kiosk, and my daughter was thrilled. Marginal labor costs reduced, while marginal customer benefit increased, at least among one demographic.

In all my life, I've had many jobs, some good and some bad. The one job that stands out as being the most fun out of all of them was fast food. It was wonderful. You're right that a good set of coworkers is what makes the experience what it is. But on the other hand, customers shouldn't have to subsidize my good times, and much of what we did involved collecting expired tomatoes and finding creative ways to dispose of them.

"I think the robo-kiosks reduce employees at the margins."

I was at McDonalds this weekend with my 4 small kids. I was using the kiosk, when the manager (who was at the counter) offered to ring me up. I demured. We started talking and it was clear that he didn't really like the kiosk. His biggest complaint was that the kiosk doesn't send the food list to the grill until after you pay.

I told him, that with 4 kids, I was slow to order, having to get all the Kid's meal options correct. And they all generally change their mind about something at least once. Which would probably annoy the grill if they had started on 4 cheeseburgers only to have them change to chicken nuggets 2 minutes later. Furthermore, the kiosk clearly displays everything so I can review all the choices.

Not only does it save labor, but it's better than a normal cashier in those instances.

"or doing the worst job of all, which is dishes.)"

I worked at a Hardee's one summer and was stuck on the Fryer, which was extremely hot. I gave the job up for working outside at a nursery in TN in August. It was more comfortable. I would have loved to have washed dishes. Granted, this place didn't rotate positions which was completely moronic.

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"But on the other hand, customers shouldn't have to subsidize my good times, and much of what we did involved collecting expired tomatoes and finding creative ways to dispose of them."

Well, I can easily make out an argument for a *community* choosing to subsidize that, as well as a general atmosphere of bonhomie - but I understand, at least in the abstract, that places like McD's, once a fun treat, are now the principal source of a lot of people's sustenance.

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Corporate taxes are a monopoly charge, hence wedge, it is not considered responsive to market. So, there can be no constant returns to scale,the corporation channel is restricted, corporations will rescale to the restricted channel. The assumption of constant returns just gives you the direction of the tax effect, not the final outcome.

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Of course, those successfully promoting cuts in taxes on capital have been wrong on the behavioral response since, well, they have been successfully promoting cuts in taxes on capital. Their response to their wrongness? More cuts in taxes on capital. We've been waiting for decades for the spike in investment in productive capital as the behavioral response to cuts in taxes on capital, and it keeps not happening, even though taxes on capital have been cut and cut and cut and cut. Maybe the economists who have promising the behavioral response to cuts in taxes on capital have been relying on their on muse, the Ron Vara for Creative Economics. [An aside, this is all beside the point, which is how to stop tax avoidance by corporations through the use of creative accounting and tax havens. The OECD has a proposal, which would base the apportionment of corporate taxes primarily according to the place where the sales of the corporation's goods or services occur. https://www.oecd.org/tax/beps/public-consultation-document-secretariat-proposal-unified-approach-pillar-one.pdf]

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“I find this episode appalling, and I hope The New York Times is properly upset at having been “had.”’

I think they found a result they liked and ran with it. That is the modern NYT philosophy, you know.

Seems 'upset' should have been 'complicit'

The basic Times question useta be 'is it true' and the current question seems to be 'does it hurt Donald Trump'. Makes it less useful to readers who want to know what's true.

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On whom falls the incidence of being upset at having been “had”?

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'Modern' NYT philosophy?

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Why are the abstracts of economics papers so poorly written that they are practically incomprehensible? Any high school student would get their essay handed back with a "C" if it included a sentence like this one:

"This paper proposes a new way to do distributional tax incidence better connected with tax theory."

It's dreadful, isn't it? I don't think I've ever heard of a distributional tax.

Nor do I know how to "do" incidence. Maybe it sounded better before the ham-fisted translation into English from the original Berkeleyvian.

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This might be kind of nuts and bolts, but Will Wilkinson was just saying yesterday that (actual) incidence is about enforcement.

You should immediately demand a refund for your Twitter University Econ degree.

Instead of trawling through your twitter feed and trolling today, maybe you can swing by Kahn Academy and learn about elasticities and tax incidence.

I can't tell, was that an ad hominem fallacy pointed at me, or at Will?

Or maybe Will through me?

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Tax evasion and noncompliance reduce government revenue and exacerbate the problem of increasing debt. Standard economic theory predicts that the identity of the tax remitter shouldn’t affect outcomes – but this ignores the possibility of evasion. This column provides evidence that in the presence of evasion, both the amount of revenue collected and the incidence of burden are sensitive to the identity of the remitter. These results should inform future tax reform.

More here.

You haven’t even touched the issue of tax incidence and elasticities.

Maybe start with derivatives before you jump into elasticities. From there you can begin to read about tax incidence.

You’re spamming nonsense again.

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And speaking of taxes, the IRS, and enforcement .. Slashdot is still firing on all cylinders.

Inside TurboTax's 20-Year Fight to Stop Americans From Filing Their Taxes for Free

We should really be on post-card confirmation stage of income tax processing. I mean how trivial is that compared to self-driving?

I actually agree with you here. But you’re still stuck behind your partisan blinders. Ask yourself the simplest of questions. Who benefits the most from a complicated tax structure?

Then ask yourself why Elizabeth Warren won’t simply follow Bernie and tell people their taxes will go up to pay for Medicare for All.

Perhaps you could discuss with your fellow Californians why they were over at DailyKos complaining about the limitations on deductions in the most recent tax reform bill. That was a move towards the post card confirmation but I’m pretty sure your Klan was complaining over their lattes.

I'm pretty sure I made a non-partisan and pragmatic claim.

Pretty weird to agree with it, and then attack it by way of things I didn't endorse.

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Is the NY Times a victim or a partner? I haven't seen any comment from David Leonhardt over the last few days, and the flashy graph is still his pinned tweet.

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Ok, you guys are missing Cowen's sarcasm in the last sentence.

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The ideal corporate income tax remains 0.

PS: Ditto for capital gains.

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Indeed, this is appalling.

More or less appalling than Reinhart-Rogoff, in your view?

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The truly hilarious bit is that every one of these schemes is build on the assumption that their politicians and bureaucrats are smarter than our tax attorneys.

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