Progressives Need to Rethink the Corporate Income Tax

Liberal and progressive online journals over the past week or so have been buzzing — rightfully so — about the recent revelation that General Electric paid no corporate income tax at all in 2010. According to a recent GAO report, about a quarter of the largest American corporations paid no corporate income tax in 2005.

But that’s really just the way the system is set up. If you think about it, the corporate income tax really isn’t all that progressive. Just about all the tax loopholes and other tricks for avoiding taxation tend to favor the big boys at the expense of everyone else. Perhaps the single best way to avoid taxes is for transnationals to shuffle income to subsidiaries in the lowest-taxed jurisdictions, so transnationals already have a leg up on the smaller companies that operate primarily in the United States. And if you look at the largest tax deductions and tax credits, they go overwhelmingly to companies that are capital-intensive (the writeoff for depreciation), high tech (the R&D tax credit), or heavily involved in mergers and acquisitions (the deduction for interest on corporate debt).

What’s more, the largest corporations are least likely to suffer for whatever corporate income taxes they do pay, because they tend to be in oligopoly industries that practice tacit pricing collusion through the “price leader” system. This doesn’t require any conspiracies or secret meetings in smoke-filled rooms. When three, four or five large firms control more than half the market in a given industry, they tend to follow the pricing practices of the dominant firm. So prices in an oligopoly market are “stickier.” The practical effect is that the big firms in an oligopoly industry are able to use administered pricing based on a markup from their costs — including the corporate income tax — and pass them on to the customers. That’s essentially the same thing a regulated public utility does.

So the largest corporations are more likely to be able to just pass their taxes on to the consumer as a markup, and set themselves an after-tax profit over and above those expenses. Smaller corporations in the competitive sector, on the other hand, are price-takers rather than price-makers. This means that the corporate income tax on the large companies is mostly paid by the customer as part of the markup, whereas the smaller firms take more of a hit on their profits.

In other words, the “progressive” agenda of closing corporate income tax loopholes and raising rates on the big boys will have the unintended consequence of raising prices on the consumer without affecting corporate profits.

So what’s the solution? Instead of taxing their profits higher, we should be eliminating all the interventions by which the state makes their profits so large in the first place.

That means abolishing copyrights and patents, state-enforced monopolies which are the single biggest source of profit in the transnational corporate economy. The biggest source of profit is royalties on information and entertainment whose marginal cost of production is zero. If it wasn’t for “intellectual property,” Microsoft Office would cost about as much as my Open Office CD (I got it for ten bucks). What’s more, trademarks and patents are the main legal support for what Naomi Klein calls the “Nike model,” by which all actual manufacturing is outsourced to independent job shops in the Third World and the corporate headquarters simply retains control of production through its control of IP, finance and marketing. Patents and trademarks are the reason for the brand-name markup of hundreds or thousands of percent between the actual cost of making those sneakers in the Chinese sweatshop, and the $200 or so the Western consumer pays at Target.

It also means abolishing government subsidies and regulatory cartels of all kinds. Regulatory cartels, in particular, have played a huge role in the formation of stable oligopoly markets and the 25% or so markup the Nader Group found in industries with the smallest number of firms.

So once again, this illustrates the same general principle that we keep coming back to: Instead of regulating and taxing the effects of government-enforced monopoly, we instead need to just get rid of the monopoly.