The FT issued an email last night saying:
Steven Mnuchin warns of market fall without tax cuts.
The US Treasury secretary warned Congress that US stock markets will shed a “significant amount” of their recent gains if lawmakers do not pass tax reform.
On the eve of a critical Senate vote aimed at pushing tax-cutting plans forward, Mr Mnuchin told Politico in a podcast that there was “no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform”. US equities would “go up higher” if the reform plans, which include a reduction in the corporate tax rate, were passed.
This is interesting for three reasons. First, it says quite explicitly that the proposed tax reforms are meant to cut the tax rates of big business. Second, it quite clearly states that the corporate tax rate changes share prices, in this case by driving them sharply upward. And third, as a result it states quite clearly that the US Treasury thinks the incidence of corporation tax is on shareholders, who are already capitalising the value of the gains they are to be given.
But in fact we already knew the US Treasury thought this last point, which Mnuchin says the evidence now supports. We know it because as, Paul Krugman has noted this month that there is:
[T]he tale of the Mnuchin Treasury's incompetent attempt to suppress an internal analysis — to send it down the mnemory hole? – on the incidence of corporate taxation. This paper reached the inconvenient conclusion that most of the tax stays where it's applied — with the owners of corporate capital — with only a small share falling indirectly on workers. In general, attempts to suppress stuff like this fail thanks to leaks. But in this case the paper has already been published in a peer-reviewed journal, so that even if the Treasury were locked down tight everyone could read it anyway.
Mnuchin wanted, then, it to be thought that incidence does not fall on shareholders even though that Treasury report said that only 18% fell on labour, but has now, with typical Trump team competence, confirmed that it really does fall on capital, and that they'd better appreciate the fact if they want to keep the advantages of it doing so.
The FT considered this further recently in a piece on 'The vain promise of tax cuts'. As was said there by FT journalist Martin Sandbu:
Tax levels, and corporate taxes in particular, have been on a downward trend in most countries, and the argument is always the same: this will stimulate economic activity and growth. So it's important to listen to Dietz Vollrath, who shows hard evidence that tax cuts do little to boost growth (and higher taxes do little to stymie it). So compelling is this evidence, in fact, that it is more productive to discuss why tax levels don't effect growth much.
He adds (and I think correctly):
Why do tax levels seem to do little to change growth one way or the other? Essentially because labour supply – the amount of hours or effort workers decide to put in – is not very sensitive to their take-home pay. Similarly for capital: new investment does not respond much to dividend taxes. In the jargon, the elasticities of labour or capital supply with respect to tax rates seem close to zero.
Or as Vollrath more picturesquely puts it: “There is not some pent-up store of workers and human capital out there that is just a 35 per cent tax bracket away from getting off their ass and going to work.”
Quite so. Or as Krugman would put it, in an alternative explanation:
A lot of corporate profits aren't a return to capital: they're rents on monopoly power, brand value, technological advantages, and so on. Inflows of capital won't compete those profits away, so the international capital market isn't relevant to the incidence of taxes on those profits.
So in other words, those seeking to explore a shift in returns between profit (the return to enterprise) and wages (the return to labour) as a result of changes in corporation tax rates are missing the point as in the large companies where measurement can be made the return being taxed is rent, which is largely unrelated in economic terms to profit and wages and is instead the return, in this case, to market rigging.
And the reality is that Mnuchin is, of course, delivering an increase in that rent. The whole process of using a fraudulent election claim - that all Americans would get a tax cut - to deliver the reality that most will get an increase and the best off and the companies that they own will get a substantial fall is a perfect example of rent seeking behaviour arising from corporate capture of the democratic process of government.
But let's stop debate on who benefits: Mnuchin has stated what we all already knew, which is that this is for the undisputed benefit of the owners of capital on whom almost all the incidence of corporation tax indisputably falls. That debate is, I think, now closed.
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If the incidence of Corporation Tax falls entirely on shareholders, could we just scrap it entirely and make up the difference by raising Dividend Tax? That would save a whole lot of administration, and companies wouldn’t have any reason to use tax havens any more.
Collecting the tax would be straightforward: the company would just pay it at the same time as they pay dividends.
Who are the shareholders?
And where are they?
Or to put it another way, why should no tax be paid on profits diverted to Cayman instead of being paid as due in the UK?
You could have a new tax on distributed dividends. This would apply to the dividends leaving the company; regardless of who the shareholders are or where they live.
But then they won’t pay dividends
And at best only one third of profits are distributed
So, only one third of the incidence of Corporation Tax falls on the shareholders?
No
They get the rest through capital gains
But if the share is registered in a tax haven that will not be taxable
I want all profit made here taxed
What is wrong with that?
I quite like the idea of a raised dividend tax. Dividends are, ultimately, pretty much the only way for investors to extract money from a business, short of winding it up, so as Andrew rightly points out, it would cut through the complexity of the current situation.
The problem with corporation tax is that it really only works well in a closed system – e.g. A uk firm trading solely in the uk. As soon as you start to introduce international supply chains and different business locations, it becomes very hard to pin down where a profit is actually made. If my business makes widgets from parts made in two different countries, and then sells them in a third, using a website hosted and staffed in a fourth country, how do we determine the profit for tax purposes, and where is it paid?
The net result is the complex and unethical race to the bottom that we currently are seeing. I think corporation tax needs a radical rethink, because it isn’t working.
I gave up in the first line
Almost no business is funded by share capital now: it’s almost all credit and retained reserves
In the second para you just descend into garbage
Makes sense to me.
I am prepared to be convinced otherwise, but not by un called for incivility.
If companies grow mainly through retained reserves (i.e. the money left over after Corporation Tax and dividends are paid out), then you’re agreeing with myself and BK. Taxing only the dividends would leave more retained reserves which the company could invest in future growth, thereby creating jobs and growing the economy.
Just so we’re clear, under my proposal the dividend would be taxed as it leaves the company. It doesn’t matter where the share is held – Cayman Islands or Chettisham – the dividend would be taxed before it reaches the shareholder’s bank account.
I disagree that companies wouldn’t pay dividends – we already have Corporation Tax and (since 2016) a Dividend Tax, neither of which have led to reduced dividend payouts. Many retired people rely on dividends as their main source of income, and can be counted upon to exercise their vote to ensure that dividends continue to be paid.
No I am not agreeing with you
Why should existing owners of captialism be allowed to grow it tax free when new ones could not?
And why should that tax free growth then be capable of extraction via low tax CGT?
You’re only keen in creating an unlevel playing field here.
And, if course, subsidising the return to cantaloupe over that to labour.
Now why would you do that?
Andrew,
Sorry for coming in late but not all corporations are big on distributing dividends. Some companies such as Warren Buffett’s Berkshire Hathaway don’t pay any dividends at all.
Nothing wrong with that.
To me that is.
And that as they say, is the end of that.
Or is it?
Those neo-libs dreamers refuse to lie down.
Coming in a bit late here sorry. One thing that strikes me is the assumption that sustaining or boosting overall stock prices, regardless of their fundamentals, is a good thing and the idea that people will all generally agree with that.
In the past we have had Greenspan cutting interest rates for the sake of sustaining a bubble. Now this guy wants to cut corporate taxes for the same reason? The difference with Greenspan is that he didn’t admit to that until after he left office. This mob are either shameless, clueless or both.
But this is rentiersim: boost stock prices, house prices, commodity prices. Do anything with economic power but boost wages
True.
I was thinking: “so this guy openly wants to do everything he can to bring on the next crash in the first year of the presidency – OK then.” But he obviously doesn’t think like I do. Oh well.
True.
I was thinking: “so this guy openly wants to do everything he can to bring on the next crash in the first year of the presidency.” But then he obviously doesn’t think like I do. Oh well.