Commentary: The among the worse taxes by which a government can raise revenue is the corporate income tax. In fact, corporate taxes have been falling globally by about half, from an average of 49% in 1985 to 24% in 2015. New Mexico is no exception to this trend, with state corporate profit tax being scheduled to fall to 5.9% in 2018 from an initial 7.6%.
The explanation for this global decline is that globalization has increased competition for productive capital. Cutting taxes makes a jurisdiction more attractive as a destination for investment in machinery plant and equipment.
The problem with this argument is that there is little evidence that investment responds much to tax rates in the real world. Rather, corporations use accounting tricks to shift income from high tax to low tax jurisdictions.
Indeed, a recent study by researchers at the Universities of Copenhagen and California found that 40% of global profits were shifted to tax havens in 2015.
We should just get rid of the corporate income tax. It is easily avoided and hard to enforce. And the tax code provides a target for lobbying efforts as changes in the law can have very direct impact on the corporate bottom line. Eliminating the corporate tax would go a long way toward draining the swamp.
This is not to say that corporations shouldn’t pay taxes A basic tenant of economic efficiency is that economic actors should bear the cost of their actions. Otherwise, decision makers will not adequately take account of the cost they impose on society. This applies to corporations the same as everyone else.
So, to the extent that a corporation imposes costs on other New Mexicans by using government services, then that corporation should be taxed to pay for those services. But the corporate income tax, because it is so easy to avoid, is a poor way of doing that. Better is to impose taxes directly related to the costs imposed.
For example, in the normal conduct of business, corporations use New Mexico roads. The gas tax should be calibrated to cover the cost of this usage. Eliminate the corporate income tax and make up for part of that loss of state revenue by raising gas tax. Similarly, corporations benefit from police and fire protection. They should (and do) pay property taxes. Raise property taxes as needed to cover the cost of protective services.Yet another example: corporations benefit from a well-educated work force, so should pay taxes that cover educational costs.
The main argument for the corporate income tax is equity. Wealthy shareholders who live in other states should profit off New Mexico citizens should have to pay taxes to support programs that help those citizens.
The problem with this is first, as argued above, the corporate taxes are easily avoided so are inefficient way to raise revenue, and second, not all shareholders are rich. Indeed, many of those invested in the market come from modest means, such as pensioners and small savers. We need find another way than the corporate profit tax.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He teaches economic development courses. The opinions expressed may not be shared with the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.