Modern Money Theory by L. Randall Wray

Author:L. Randall Wray
Language: eng
Format: epub
ISBN: 9781137539939
Publisher: Palgrave Macmillan
Published: 2015-04-20T04:00:00+00:00

5.6 Bad taxes

In this section we will look at three types of taxes that might not be desirable from the perspective developed in this chapter: payroll taxes, consumption taxes, and corporate taxes. Above we have implied that payroll taxes favor robots over human workers. Human workers receive less net pay and their employers have to pay more to hire them – on the margin, workers might choose leisure while employers might replace them with robots. Further, since payroll taxes are by no means universal across the globe, nations that use them are at a competitive disadvantage in internationally traded goods and services. Where production is highly competitive with foreign production, it is likely that the employer portion of payroll taxes is largely born by workers (in the form of lower pay) as domestic firms try to remain competitive. Where there is little external competition, the employer portion (and maybe even the employee portion) is passed along to consumers in the form of higher prices.

Ruml noted that the US payroll tax is also deflationary as it is designed to produce more revenue than is spent on Social Security benefits – that is, it attempts to build a Trust Fund that is supposed to pay for future retirees. Finally, the payroll tax favors nonwage income sources such as profits, rent, transfers, and interest; it also favors work in the informal sector (where taxes can be evaded) over formal sector work. It is probably not in the public interest to discourage work in favor of these other income generating activities. In recent decades, growth of these other income sources relative to wage goods has also contributed to rising inequality.

Ruml also advocated eliminating taxes on consumption, except those imposed on undesirable consumption (sin taxes on harmful products and luxury goods, as well as tarrifs on imports). He argued that if a nation’s prime objective is to increase the standard of living of its population, it makes no sense to tax away the purchasing power that would allow them to achieve higher living standards. In addition, consumption taxes tend to be regressive, hitting lower income harder (although taxes on luxury goods and exemptions on food make the tax less regressive).

Finally, Ruml argued that corporation taxes should also be eliminated as particularly pernicious. The corporation tax is paid by stockholders, employees, and consumers. Stockholders pay a portion because their returns on stocks held are reduced compared to what they would be without the tax. Exactly how much of the tax is passed to owners is not known. However, note that owners also pay taxes on their income and capital gains that result from ownership. Many have pointed to this “double taxation”. If it is desirable to tax income accruing to corporations, the best solution would be to allocate all corporate profits to owners and to tax them as income through the progressive income tax.

However, much of the corporate tax is passed backward to employees (in the form of lower wages and salaries, and benefits) and forward to consumers in the form of higher prices.

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