26 July 2007

Oh that Hubbard!

Glenn Hubbard, Mitt Romney's economic adviser, talks taxes in today's Wall Street Journal:

Who bears the corporate tax burden? Some may be tempted with a quick answer, "corporations." But that is clearly wrong. The Econ 101 admonition that people pay taxes -- in this case, suppliers of capital through lower returns, workers through lower wages, and/or consumers through higher prices -- remains true even when the tax is aimed at capital. And the category "owners of corporate capital" (that is, stockholders) is also too narrow. In his celebrated analysis of the corporate tax almost 50 years ago, Arnold Harberger showed, for a closed economy, that a separate tax on corporate capital would reduce returns to all owners of capital, making it a tax on saving (and, in a framework more general than Mr. Harberger's, on investment)...

...In other research assuming that the world-wide capital stock is fixed, William Randolph of the Congressional Budget Office finds that labor bears about 70% of the corporate tax. More generally, the burden on labor is higher to the extent that saving is responsive to after-tax returns and the country has a small effect on world prices of goods.

Taxing corporate profits decreases the incentive to buy stocks. Once corporations pay higher taxes, they have less money to give to their stockholders. This drop in profitability dissuades stockholders from buying more stocks. Why buy a pricey stock if you'll lose a third of every dollar you make from it?

When people buy fewer stocks, corporations have less money for expansion. Corporations build fewer factories and hire fewer workers than they would have if taxes weren't as high. Workers lose the opportunity to learn skills or earn experience they need to get higher paying jobs.

And who wants to raise corporate taxes?