Greg Mankiw Promotes the Myth of Double Taxation

There is an old myth developed by rich people at some point in the distant past that paying taxes on dividends amounts to "double-taxation." The argument is that profits are already taxed at the corporate level, so taxing money when it is paid out as dividends to shareholders is taxing the same profit a second time. Gregory Mankiw, a Harvard University professor and former top economist in the Bush administration, pushes this line in a column in the NYT.

The trick in this argument is that it ignores the enormous benefits that the government is granting by allowing a corporation to exist as a free standing legal entity. The most important of these advantages is limited liability. If a corporation produces dangerous products or emits dangerous substances that result in thousands of deaths, shareholders in the corporation cannot be held personally responsible for the damage. The corporation can go bankrupt, but beyond that point, all the shareholders are off the hook, the victims of the damage are just out of luck.

By granting corporate status, the government has allowed investors to shift risk to society as a whole. In exchange for this and other privileges of corporate status, the corporation must pay income tax on its earnings. We know that investors consider the benefits of corporate status to be worth the price in the form of the corporate income tax, because they voluntarily choose to form corporations. If investors did not consider the benefits of corporate status to outweigh the cost of the income tax, then they are free to form partnerships which are not subject to corporate income tax. In this way, the corporate income tax is a completely voluntary tax. Anyone can avoid the tax by investing in a partnership, or alternatively, any corporation can be restructured as a partnership.

The complaint about double taxation is an effort to get the benefits of corporate status for free. It is understandable that rich people would want to get benefits from the government at no cost, just like most of us would prefer not to pay our mortgage or electric bill. But, there is no reason for government to be handing out something of great value (corporate status) for free. If rich people don't like the corporate income tax, they have a very simple way to avoid it -- don't invest in corporations. The problem is that the rich are just a bunch of whiners.

--Dean Baker

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