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?