Abstract
Corporate taxation is a perennially controversial topic in American politics. In fact, it may be the tax policy controversy that most Americans are aware of and even have an opinion about. Nevertheless, the purpose of corporate taxation is unclear in popular, or even for that matter, academic, discourse. In this paper we lay out and critically evaluate contemporary and historical corporate tax policy debates based on three common justifications for taxation: the “revenue” justification, the “distribution” justification, and the “behavior” justification. The revenue theory argues that the purpose of taxes is to raise the money required to finance expenditures. The distribution theory argues that certain taxes are required to produce desirable distributional outcomes. The behavior theory argues that certain taxes are required to change organizational and individual behavior in ways that benefit society.
This paper will trace the application of these justifications in American corporate tax law debates from the late nineteenth century through to the present, and analyze the implications of these debates to the contemporary corporate income tax debate. In particular, we argue that: a) following the observation made in 1946 by former President of the New York Federal Reserve Beardsley Ruml that, in the context of a modern government with a non-convertible currency, a floating exchange-rate, and its own central bank, “taxes for revenue are obsolete,” the revenue theory is empirically false; b) The distribution theory case for the modern corporate income tax is weak; and c) from the perspective of the behavior theory, the modern corporate income tax has strongly perverse impacts on corporate behavior.
Keywords: corporate income tax, money, taxation, the firm, market structure, fiscal policy, revenue, firm behavior
JEL codes: D01 D02 D04 D21 E02 E42 E61 E62 G30 G38 H20 H21 H23 H25 H32 K20 K34 L00 L11 L16 L22 M20 M21 P42
