IMF’s Lagarde Entirely Wrong About Corporate Profits Taxation

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That we might want to alter the system of corporate profits taxation is fair enough. But if we’re going to do that then we really need to be getting the underlying economics right. Corporate profits tax isn’t a method of taxing a company – there’s no there there. Taxes are paid, in the end, by the wallet of some live human being getting lighter. The study of whose is the study of tax incidence. A company is simply a collection of people, the taxation burden will lie on some collection of people inside and outside the company.

It’s also true that we like capital being employed to go do things. For we like the results of things being done, we get to consume those results. We’d prefer not to be taxing the returns to capital in order that we get more capital being employed. Thus we get the standard prescription, that returns to capital should not be taxed so as to make that future richer than it would be if those returns were taxed.

That’s obviously not going to work politically and it doesn’t quite work in economics either. For there are those who make monopoly profits. Or even just “excess profits”. These are those that don’t come from the normal economy boosting deployment of capital but from some special position, possibly legal privilege, within the economy. Thus we reach the Sir James Mirrlees position – and he did get his Nobel for his study of tax systems – that we should not tax normal profits but we should tax super-, excess- or monopoly profits.

Christine Lagarde of the IMF gets this entirely wrong:

Second, to create a system that fully taxes routine profits — something like a normal return on investment —

No, that’s not what we want at all. We want routine profits, that normal return on investment, to be untaxed entirely. It’s is only those excess profits which should be taxed at all.

All of which is a good description of why the world’s such an appallingly run place. Those doing the running don’t understand the basics of how it should be run.

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