Back in January, I wrote that the departure of Council of Economic Advisers Chairman Glenn Hubbard from the White House reduced the chances of getting a good tax bill this year. Unfortunately, my prediction is coming true.
Hubbard was the key person who convinced President Bush that elimination of the double taxation of corporate profits should be the centerpiece of his tax proposal. Hubbard is probably the leading expert on the subject in the United States among economists and author of a definitive study on the subject, which was published by the Treasury Department in 1992.
Hubbard's reasoning is impeccable. Double taxation of corporate profits raises the cost of capital, reduces investment, slows growth and costs jobs. That is why almost every other major country offers some provision for redressing double taxation, according to a Cato Institute study.
Interestingly, one reason for Japan's amazing postwar growth is that it adopted much lighter taxes on businesses at the behest of the United States. In a 1949 report to Gen. Douglas MacArthur, a group of American economists led by Carl Shoup recommended that Japan avoid double taxing corporate profits.
Their analysis is still valid today: "The corporation has always exerted a certain fatal fascination for the legislator looking for a source of additional revenue. Corporations are impersonal entities, often without the ability to voice as strong a political protest as other groups of taxpayers. ... Thus it is that ... heavy taxes are imposed on the corporation with hardly any semblance of economic justification or logic, merely because such taxes are found politically popular, easy to administer and productive of substantial revenues. ...
"Fundamentally, however, a corporation is but a particular kind of aggregation of individuals, formed for the purpose of carrying on a given business. Provided that the corporation does not become unduly large, and that it conducts itself with proper attention to the rules laid down by law, there is no reason, in principle, either to encourage individuals to use the corporate form or to deter them from using it.
"Ordinarily, therefore, it is not proper to impose a substantially heavier tax on business done in the corporate form than on business done through an unincorporated enterprise, or vice versa. Any such differential will, in fact, tend to impair the efficiency with which the economy is operated by inducing a movement away from that form or organization which is most efficient in production toward that form of organization that is given the lighter tax burden."
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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