August 5, 1985

VAT After All?

Download Working Paper No. 2: VAT After All?

It was commonly observed in the aftermath of the 1981 tax bill (The Economic Recovery Tax Act—ERTA) that the Federal corporate income tax was dead; that no corporation with a half-awake tax accounting department would need to pay corporate income taxes. That was a wild exaggeration but Congress has been taking the charge to heart ever since. It already has taken back, of course, a lot of the 1981 tax benefits to the business sector. It pays close attention to each new ‘study’ of effective corporate income tax rates and other materials purporting to show how slim the corporate share of taxes has become. Tax reforms pending before Congress would increase drastically the overall burden of corporate taxes, and even if these reforms do not advance, there are others waiting in the wings to stiffen the corporate minimum tax, to ensure that corporations pay their “fair share. ‘

The reasons for the decline in overall corporate tax receipts as a Percent of total Federal tax receipts have been fairly well documented.

More recently, the focus has turned on (1) the wide variation in corporate effective tax rates associated with investment in different industries and asset categories ; and (2) the extent to which individual corporations with significant ‘economic income’ manage to escape with little or no Federal tax liability. In the first category are all the recent critiques of ACRS based on hypothetical application of assumed discount and inflation rates to individual types of investments. Ignored in the process is the real world condition that firms must operate with a mix of assets both tangible and intangible, and that the possibility of a negative tax rate that might theoretically obtain from a firm’s particular equipment investment, utilizing tale investment tax credit and ACRS, is much more unlikely to apply to the firm as a whole.

We also must bear in mind that the ultimate burden or incidence of corporate taxes is always borne by people, not inanimate corporate structures. Investors, workers or consumers ultimately will bear the burden depending on the economic circumstances of the industry. Because the precise proportions are not known and the process is obscured from public view, the corporate income tax in particular is a hidden tax and, as such, always more susceptible to political manipulation. As long as Congress and the Administration insist on revenue counting and estimating procedures showing ‘individual effect s’ and ‘corporate effects, ” we are forced to go along with this terminology and the fiction-of the corporate tax burden as an entity in itself.

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