Mankiw on Corporate Taxes

Ok. I think I've beaten the corporate tax horse to death lately, but I like Greg Mankiw so I wanted to post this one. He wrote an opinion piece in the NY Times a few weeks ago about reducing corporate taxes. A couple good excerpts:

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax.

He continues further to discuss why to focus on corporate tax reductions rather than personal income tax reductions:

Despite these findings, a corporate tax cut as a way to help workers may strike some people as needlessly indirect. Why not just pass an income tax cut aimed squarely at working families, as Senator Barack Obama proposes?

The answer is that while most taxes distort incentives and shrink the economic pie, they do not do so equally. Compared with other ways of funding the government, the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the “distortions that the corporate income tax induces are large compared with the revenues that the tax generates.” Reducing these distortions would lead to better-paying jobs.

I think the general idea here is - why tax the source of people's personal income before they even get it? Instead, just focus on taxing people once. Here's another excerpt where he comments on that:

Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts. To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.

He even goes on to comment that the tax cut could be self-financing in the long-run - i.e. there would only be a minor revenue loss as a result. And he surprisingly suggested raising the gasoline tax to make it up! I suppose considering Europe pays $12 a gallon compared to our $4 a gallon there's room for it. But man that'd be painful!