Toward the end of his excellent article “American Taxation” in the May/June issue, John Steele Gordon places insufficient emphasis on the fact that the corporate income tax is a consumption tax. The financial performance of any corporation is measured by its stockholders on the basis of after-tax income. The consumer pays the added cost of corporate income tax along with cost of manufacture, sales, overhead, and of course after-tax profit. The concept promoted by politicians and social engineers that the corporate income tax is borne solely by the wealthy stockholders is completely false.
B. Z. Miller
Wilmington, Del.
American Taxation
I found Mr. Gordon’s conclusion about the merits of a flat tax on income to be a bit misleading.
While he does not make clear exactly how a flat income tax would apply to corporate income, I can only presume that he has in mind a tax similar to proposals made by the Republican presidential candidate Steve Forbes, the House Majority Leader Dick Armey, and the economists Robert Hall and Alvin Rabushka. It is not true to say that such a tax would tax “all income but. . . only once.” These flat-tax proposals envision levying a “cash flow” tax at the corporate level with immediate and full deduction of all capital expenses. As a result, most income from capital would not be taxed. For most individuals, over the course of a lifetime the Hall-Rabushka/Armey/Forbes flat tax would be equivalent to a tax on wages and salaries. In fact, the proposed personal exemption would provide the only real difference between the flat tax and a consumption-based tax.
Adil Sayeed
Ontario, Canada
American Taxation
John Steele Gordon is an excellent historian, but when he ventured beyond history and into policy advocacy—particularly his advocacy of a flat income tax (no good just calling it a “flat tax,” Mr. Gordon; we know you mean a tax on income)—he missed his mark, especially when he dismissed the notion of a sales tax as inherently regressive.
He is wrong, for (at least) two reasons: First, people with greater incomes and greater net worth spend and buy more than poor or middle-class people, so they will automatically pay more of a national sales tax. And when purchases are taxed, then the tax reaches not only those with high reported incomes but also those with hidden incomes and high net worth.
Second, and more important, Mr. Gordon has forgotten the purpose of taxation. The real value of any tax is (or should be) that it acts as a disincentive to whatever activity is being taxed.
Thus any tax on income acts to discourage people from working and from earning and saving money. What could be more regressive than that? In this world of overpopulation, depletion of natural resources, cultural and moral poverty, pollution and violence, can’t we think of anything we would rather discourage than employment and thrift?
Patrick O’Toole
Yarmouth, Maine
American Taxation
It’s amazing that an author as knowledgeable about history as John Steele Gordon should understand so little about public policy. Toward the end of his article, he asserts that under a flat tax “the guy down the block who is making more money [will pay] not only more taxes but a higher percentage.”
Few statements could be more wrong. First, unless a flat tax is described in some detail, discussion of it is nonsensical because every participant in the discussion has a different vision of what a flat tax is. In some flat-tax plans the rates are progressive. Second, no flat-tax plan that has been introduced in the Congress would give Gordon’s assurance that everybody is paying tax on income. Third, unless rates are higher than Gordon’s 20 percent, a flat tax, in whatever form, will bring in less revenue than the present overly maligned income tax. Fourth, as with all flat taxers, he does not have the conviction of his courage. If flat is good, why then make any argument for progressivity? If he wants low rates, they theoretically can be achieved under a progressive rate system with a broadened base. I say “theoretically” only because the existing code has been rendered the way it is by politicians and human behavior. Does Gordon expect to repeal these while also repealing the existing income tax?
Charles Davenport
Professor of Law and Arthur L.
Dickson Scholar, Rutgers University,
and Chief Editorial Officer,
Tax Analysts, a tax-exempt,
nonprofit educational organization
Newark, N.J.
American Taxation
John Steele Gordon replies: B. Z. Miller says that the corporate income tax is a consumption tax because the customers pay it. In fact economists simply don’t know how the corporate tax is distributed among customers (in higher prices), employees (in lower wages), and stockholders (in decreased return on investment). Figure out how to determine this reliably, and you probably have a Nobel in economics bagged.
As for Adil Sayeed, in a perfect world, there would be no such things as corporate income tax, precisely for the reason given above: We don’t know who pays it. Instead the tax on the profits should be paid by the stockholders personally, with the corporation merely withholding the money, as they do the taxes due on wages a corporation pays. This is how the taxes on partnership profits are paid. Why should corporations be any different?
Mr. O’Toole backs a sales tax, saying it would not be regressive because the rich spend much more than the poor. True. But they spend a much lower percentage of their incomes than do the poor. Adam Smith thought each man should pay according to his ability to pay, not his inclination to spend, and so do I. Further, I have news for Mr. O’Toole: All taxes are income taxes, because we pay them out of our incomes. Whether we incur the tax by earning ten thousand dollars or by spending ten thousand dollars is neither here nor there.
Finally there is Professor Davenport. To me a flat tax (1) exempts enough income for a citizen to live at the level of comfort and security that we as a nation regard as adequate and (2) taxes every dime earned above that amount at a flat rate. This would make my statement true. And as the writer knows perfectly well, American Heritage is hardly the place for discussing the minutiae of particular tax plans. Then he says that a 20 percent rate would not be high enough to raise as much revenue as the government does now. First, I used the 20 percent rate merely to illustrate how a flat tax is paradoxically progressive. Second, no one, and I mean no one, has any real idea what any particular flat rate would bring in. There are no economic models that are anywhere near reliable enough to give a prediction that rises above a wild guess for so fundamental a change. But to say that therefore we can’t change the tax system is simply a defense of the indefensible, the current tax system.
Finally he accuses me, along with all flat-tax advocates, of lacking “the conviction of [my] courage” because I note that the flat tax is a progressive tax. Well, it is a progressive tax. Under a flat tax the rich pay a higher percentage of their incomes than do their less fortunate fellow citizens. I am not responsible for an artifact of mathematics. Now wouldn’t it be nice if those who oppose a flat tax—including all too many who write editorials and columns for very distinguished newspapers—would stop lying to their readers by writing over and over that the flat tax isn’t progressive?
