Corporate Taxes

Computing Bounds

Consider this table

GroupDividends "title": "Distribution of Long-Term Capital Gains and Qualified Dividends by Cash Income Percentile, 2012"Savings Rate "title": "Wealth Inequality in the United States Since 1913: Evidence From Capitalized Income Tax Data"Avg Income "title": "Where the 1 Percent Fit in the Hierarchy of Income"
Top 1%$85,091 (48%)37%$1,310,000
90-99%$46,630 (26%)14%$167,000
Bottom 90%$46,326 (26%)0%$36,000

Let’s consider what cutting \$1 from corporate taxes and raising \$1 in income taxes will directly do for each group (assuming this is via a new flat tax).

Group#Dividend IncomeDividend TaxesIncome TaxesNet SavingsNet Consumption

Adjusting for income-levels, this implies a loss of 0.75 utils. However, it also implies that companies will save 40¢ for a net-saving of 38¢. Recall from before, that this will boost long-run consumption by between 72¢ and 137¢.

However, 40% of the consumption gain will go to capital-income rather than labor-income. Thus, this 72-137¢ gain will be split between a 43-82¢ gain among laborers and a 29¢-55¢ gain among capitalists.

Using the tables above, we can estimate that \$1 of dividends are about a third as good \$1 of labor income from a utilitarian perspective: $$ \frac{0.48 \cdot (1/1310) + 0.26 \cdot (1/167) + 0.26 \cdot (1/36)}{0.01 \cdot (1/3100) + 0.09 \cdot (1/167) + 0.9 \cdot (1/36)} = 0.358 $$

To normalize this so that the average gain in long-term consumption equals 1 util, we solve $$ 0.6 \cdot x + 0.4 \cdot 0.358 \cdot x = 1 $$ where $x$ is the utility of \$1 of long-term laborer-consumption. Solving this reveals that labor consumption equals 1.35 utils while capitalist consumption only yields 0.48.

Using this, we can determine that the increase in investment from corporate profits will increase utility by between 0.72 and 1.37 utils. If we add this to the utility lost by consumers, we get a range between -0.03 and +0.62 utils. Additionally, federal revenues will be 16¢ higher because of the increase in capital gains tax revenue.

It appears, then, that the smart money is on not taxing corporate profits at all - at least until the savings rate increases significantly.

Works Cited [show]