Let’s play a little guessing game. Who wrote the following?
A corporate income tax, which allows interest to be deducted prior to the determination of taxable income, induces debt-financing and is therefore undesirable. A corporate income tax also allows nonproduction expenses such as advertising, marketing, and the pleasures of the executive suites to be charged against revenues in determining the taxable income. As advertising and marketing are techniques for building market power and as ’executive style’ is a breeder of inefficiency, the corporate income tax abets market power and inefficiency just as the corporate income tax abets the use of debt-financing. Elimination of the corporate income tax should be on the agenda.
If you couldn’t tell even before reading the quotation that I was not going to quote a typical right-wing free-market ideologue, the passage about advertising and marketing being techniques for building market power should certainly have tipped you off. At any rate, the author of this quasi-reactionary screed against the corporate income tax is none other than Hyman Minsky (Stabilizing an Unstable Economy 1986 edition, p. 340) who has, posthumously, become a kind of cult figure among today’s progressives and anti-capitalists. But obviously Minsky was not a simple-minded fellow, and his work, from the little of it that I have read (mainly his biography of Keynes) is the work of a sophisticated and knowledgeable thinker who had a very practical understanding of how markets, especially financial markets, operate. That doesn’t mean that I share his general outlook on economics and finance, just that his view ought to be taken seriously, and his proposals given careful consideration.
In addition, if a left-wing cult figure like Minsky could have advocated doing away with the corporate income tax, then maybe there is some hope that a revenue-raising budget deal could be reached between Republicans and Democrats in which the corporate income tax and the employer “contribution” to social security (i.e. an employment tax) also opposed by Minsky could be traded for a Value Added Tax (with some exemptions to make its incidence somewhat progressive). To start with the trade could be revenue-neutral, but presumably a somewhat progressive VAT would generate a faster rate of growth in revenue (both from progressivity and enhanced efficiency) than the corporate income tax and employer “contribution” to social security.
On the subject of corporations, I would also like to mention a great little book (unfortunately long out of print) written by my late friend, Harvey Segal, at one time an editorial writer for the Washington Post and later chief economist for Citi Bank in the Walter Wriston era, Corporate Makeover. The automatic identification of free-market capitalism with a system of business organization dominated by corporate ownership, which sprang up almost overnight in the late nineteenth century, deserves more critical attention than free-marketers are usually willing to give it. Perhaps anti-corporate rhetoric from the left produces a compensating defensiveness on the part of free-marketers, causing them to defend corporations against all negative criticism, but even Hayek expressed considerable unease with the extent to which the corporate model separates corporate decision-making from the interests of the (nominal) owners.
HT: June Flanders
Update: As an anonymous commenter points out below, there is no reason to restrict the trade to corporate taxes for VAT, pollution taxes and certain other kinds of taxes on rent-producing activities could also be part of the mix.
Uneasy Money 
David,
You said,
“Perhaps anti-corporate rhetoric from the left produces a compensating defensiveness on the part of free-marketers, causing them to defend corporations against all negative criticism, but even Hayek expressed considerable unease with the extent to which the corporate model separates corporate decision-making from the interests of the (nominal) owners.”
This remind me of a fringe Austrian grouping the Agorist – they are anti big government, anti-big business and anti-big banks. I also came to think of Karl Hess…this is not a critique your views – rather the opposite.
LikeLike
I think this gets at the limitations of tribal political groupings. I’m a lefty and see nothing to disagree with in the quotation.
LikeLike
If we’re going to repeal the corporate income tax, we should also consider levying taxes/royalties on sources of economic rent, such as land, EM spectrum rights, pollution quotas and the like. Such taxes would be very efficient (even more efficient than a consumption/VAT tax, especially as the cumulative tax wedge increases), and replace the share of corporate income tax which currently bears on rent-generating assets.
LikeLike
Lars, Never heard of the Agorists. Karl Hess was an interesting, and in many ways an admirable, guy, but he was a little, well, cuckoo. So I am not sure if I would exactly want to be considered as belonging to the same school of thought as them. But I accept your compliment in the spirit in which it was given.
Will, Then you are my kind of leftist. I once started writing an article which I was going to call “Hayek for dummies, er, leftists.” I wanted to explore Hayek’s views on corporate power and his skepticism about copyright and patent law (now mislabeled as intellectual property). But I never finished it.
A pity.
anon, Thanks for your comment, which prompted me to add an update at
the end.
LikeLike
“…which allows interest to be deducted prior to the determination of taxable income…”
It seems that he arguing more against the deductibility of interest and marketing expense than against corporate taxes per se.
LikeLike
Good point, David, but i am an admirer of Minsky, as I am an admirer of Keynes. That doesn´t mean that I´m keynesian. But I think that between Keynes and Friedman (I admire him also) there is a area of reality don´t touched, apart the great concidence of both in some monetary aspects (see http://www.wissensnavigator.ch/documents/keynesfriedman.pdf).
In any case, in the current times, I feel quite atraction for Keynes. And Minsky explain keynes very well.
All in all, I don´t agree with Minsky in this concrete point.
LikeLike
A couple of ultra-hardcore righties named Redleaf and Vigilante recently wrote a book entitled “Panic: in which they describe the current system of stock market ownership—many shareholders per company, and then many of those shareholders are mutual fund etc with widespread ownership of many companies—as very, very “weak” ownership.
I agree with this. Really, if you owned a large company all by yourself, and wanted to find a talented CEO would you pay more than $1 million a year? And knowing the track record of mergers (terrible for acquiring companies) would you ever want to merger?
But here’s a question I put out to all classical economists: Okay, for years we have said we should have lower taxes on investment and higher taxes on consumption. But what if we reach an age (perhaps now) in which we have capital gluts. That is, some cultures have high savings rates unrelated to interest rates. Savings for college, retirement, security.
In an ear of capital gluts, do we need the tax code to encourage even more savings?
LikeLike
I think that it would be better to trade a carbon tax for lowering of the corporate tax to 4%. (I like to keep a a low corporate tax in existence to encourage the creation of partnerships which are fully liable for their losses. )
LikeLike
@Benjamin Cole,
In my investing I favor companies with one big shareholder who I think will insure that the interest of stockholder is considered. It seems easy enough to do.
Also IMO the reason that we shareholders cannot reduce CEO compensation is that it is such a small part of corporate income. Never the less one can invest with Carl Icahn. He likes to buy controlling shares in companies and bring in low compensation CEOs.
LikeLike
“pollution taxes and certain other kinds of taxes on rent-producing activities could also be part of the mix”
I agree with this theoretically, but as actual policy it runs into any number of issues, both in implementation and execution. First off the bat, neither the public nor the political class is clear on the idea of economic rent, and it must be admitted that it is a confusing term, since “rent” has a different meaning in widespread use. So persuading people will be tough. Then you run into the issue that every single recipient of economic rents — stockholders and employees of oil companies, copyright and patent holders, Donald Trump, medical professionals, et al — really think it’s swell, and will fight tooth and nail on tax proposals that single out their income (I presume this is why it took three decades to overturn the Corn Laws). It is far easier to sell people on a tax that hits the whole population, or falls predominantly on people with no influence.
In implementing and maintaining the tax, meanwhile, you’d run into many of the knowledge problems that central planning and price controls suffer from. The dynamics of the rent-seeking economy can change quickly with technological developments, changes in state and municipal law, and shifts in social norms. The tax system once implemented is likely to lag behind the economy’s actual pattern of rent generation.
This brings up what for me seems the biggest objection to such a sane, non-distortionary system: in practice, a progressive income tax is likely to fall predominantly (though imperfectly) on these same economic rents. To the extent that this is the case, we can make sense of the fact that in practice high progressive income taxes do not seem to discourage industry nearly as much as the classical argument suggests they should.
I want to respond to what you said about tribal affiliations and Hayek, too, David, but I know I have already been a bit tiresome.
LikeLike
Clive, You are right that one of his objections to the corporate income tax — that it encourages destabilizing debt financing instead of stabilizing equity financing — could be dealt with by eliminating the interest deduction from corporate taxable income. But that is not his sole objection as the quotation makes clear.
Luis, I am in favor of having eclectic tastes in general and eclectic tastes in economists in particular. I don’t think that any one economist or school of economics has all the answers. I should also note that I was much too stingy in my praise of Minsky’s financial expertise. He was enormously well read and, as June Flanders informs me, was an upper-level bank executive before he embarked on an academic career. Whether he was a better bank executive than Schumpeter was when he tried his hand at banking, June did not say, but I am going to guess that he was, if only because it would be hard to have been hard to have any worse as a bank executive than Schumpeter was.
Benjamin, In my years at the FTC, I have seen more than one merger that made absolutely no sense from a business point of view (at least no sense that the executives were willing or able to articulate). Figuring out what the optimal savings rate is devilishly hard.
Floccina, Your point about the carbon tax and a minimal corporate income tax makes sense to me. I also like your point about the advantage of investing in a company with at least one stockholder or family of stockholders that has a big stake in the firm. That is actually a point that Harvey Segal made in the book, Corporate Makeover, mentioned in my post.
Will, I don’t really disagree (or at any rate not much) with anything you say, and if you want to talk about Hayek I am always game for that.
LikeLike
I’m a little (OK, a lot) unclear on how Hayek proposed we control corporations without regulation (which he seems to be against whenever I’ve seen him quoted, haven’t read his actual works in full yet), or if he even proposed anything at all, but rather, expressed his concern without suggesting any remedies. Hayek is very much the libertarian’s guy these days, and libertarians, in their current form, are anti-regulation in almost every form it could take. If their intellectual standard setter had some actual ideas, they might serve as a starting point for finding a solution to a problem, creeping domination of our lives by corporations, that is becoming quite a big deal.
LikeLike
MG, Hayek wasn’t proposing to control corporations. He was not into control, he was into improving the overall legal framework subject to which individuals and institutions make decisions so that those decision lead to outcomes that enhance well-being of people generally. He was sensitive to the problem that corporate management are often not constrained to act in the interest of the owners (stockholders of the corporation) and wanted to change the legal framework governing corporations to make management more accountable and more responsive to the interests of the owners. One reform that he favored was to force corporations to attribute all undistributed profits to stockholders for stockholders to pay tax on as ordinary income. Doing so would reduce the incentive for corporations to retain earnings rather than distribute it to shareholders as dividends which would tend reduce the incentive for corporations to expand internally rather than let expansion occur by the formation of new businesses. In addition, he was very clear that corporations are artificial persons created by the state and that they therefore are not automatically entitled to the same legal rights that actual people are entitled to. That view is now considered decidedly left-wing.
LikeLike
So Hayek was all about the interests of the owners of corporations, rather than the interests of society as a whole, or did he think along the lines of “Good for GM is good for America?”
For a couple of years now, I’ve been thinking that the entire libertarian movement is largely a reaction to communism/Stalinism/Leninism/whatever you want to call it, and as such, people like Hayek were almost entirely oblivious to the problem of corporations, rather than governments, having too much power (Ayn Rand, the ultimate libertarian icon and fugitive from the communist Soviet Union, comes to mind). I’ve seen stuff, even in Adam Smith, which shows an understanding of businesses having too much power as a potential problem, but nothing in Hayek’s stuff — which, to be fair, I’ve generally only seen quoted by partisan libertarians, who are obviously going to take what suits their purposes, and leave the rest.
LikeLike
I’m a hard lefty who is very much a minskyan (having read a a multitude of his papers and both his biography of keynes and stabilizing an unstable economy multiple times) and i agree with minsky on the corporate income tax point. also, hayek’s individualism and economic order and the road to serfdom are on my pile of books to read. so his Hawtrey’s Trade Depression and the Way Out.
LikeLike
MG, Hayek thought along the lines of Adam Smith and David Hume, believing that under certain conditions a system of private property would encourage owners of property seeking their own self-interest to act in such a way that they advanced the interest of members of society at large. That remarkable result does not happen automatically, but if a legal system has certain optimal characteristics the result can be realized even though no one consciously tries to bring it about. That, at any rate, was Hayek’s view, which you are free to agree with or not as you please. You can ridicule it or cast aspersions on his motives, but that doesn’t count for any more than ridiculing Copernicus because it’s obvious that the sun revolves around the earth and that the earth is flat or ridiculing Einstein because it seems incredible that two observers traveling at different speeds would disagree about which of two events they both observed took place first. You also might be interested to know that Ayn Rand absolutely hated Hayek, because she felt that he was too moderate and too willing to compromise. For a similar anti-Hayek viewpoint from an extreme libertarian see this outburst at Mises.org
nathan, Looks like you’ve got a lot of good reading ahead of you. Keep us posted on your progress.
LikeLike
guess who wants corporate taxes…the big banks…how do you think the interest dedcutions got written into the code…random chance?
geez lefties are naive
LikeLike
creeping domination for corporations is aided by government. Do you somehow imagine that the Fed and SEC are protecting us from JP Morgan and Goldman Sachs…or that Obama is protecting us from GE and Blackwater? regulatory capture bitches!
LikeLike