RALEIGH – The usually sensible Jack Betts, editorial writer and columnist for The Charlotte Observer, has fallen for the latest conventional wisdom bouncing around the state’s capital: the idea that North Carolina’s fiscal problems are primarily explained by our antiquated, and thus inadequate, tax system.
In Sunday’s paper, Betts restated the main elements of this myth (see http://www.charlotte.com/mld/observer/news/editorial/3705377.htm). He points out, quite correctly, than the share of state revenues derived from corporate taxes has fallen in recent decades. Half a century ago, personal income taxes made up 15 percent of the revenue base and corporate income taxes about 10 percent, he reports. Now, the shares are 55 percent and 5 percent, respectively.
There is something important going on here, but Betts and others making this argument (Winston-Salem Journal columnist Paul O’Connor and various UNC academics come to mind) are missing it. You see, all corporate income taxes are personal income taxes. Corporations are multilateral, ongoing, and ever-changing contracts among individuals. As such, they can’t pay taxes. Corporate income taxes are a way to tax individuals who 1) receive corporate profits as dividends or capital gains, 2) work for corporations, or 3) buy things from corporations.
Basically, they tax all of us, as income-earners, to varying degrees depending on our investments, our employment status, and our patterns of consumption. In each case, corporate taxes are imposed on income that has been, or will be, taxed as individual income, too. The correct tax policy should be to tax every form of income once, and only once. For this reason, experts in tax policy argue either that corporate taxes should be abolished altogether or, perhaps more practically, that individuals should receive exclusions from tax for any income received from corporate investments.
Now, as to the real significance of the changing shares of corporate and personal income, they involve the changing nature of company finance. Back a half-century ago, many corporations paid dividends, and derived a significant share of their financing from equity. As Robert Samuelson wrote in an excellent column that also ran in yesterday’s Charlotte Observer (see http://www.charlotte.com/mld/observer/news/editorial/3705359.htm) corporations were “leveraged” – that is, reliant on debt rather than equity financing – only to the tune of about 40 percent in 1952. Today, about three-quarters of corporate financing comes from bonds and other debt, while equities, even after the high-flying 1990s, play a much smaller role. Basically, because of absurd tax policy, corporations have been encouraged to shift their financing activities to debt, thus reducing apparent earnings and corporate income tax payments.
Another brief point about Betts’ argument is that it is flatly contradicted by the facts. As North Carolina has grown more dependent on the personal income tax, and proportionally less on regressive and selective sales taxes, its ability to “keep up” with economic and population growth has improved. Despite income tax cuts in the 1990s, we remain a state more reliant than most on income taxes (which helps to explain why our tax system is essentially proportional – the rich and the poor pay nearly the same percentage of their income in combined state and local taxes, contrary to what Betts reported).
During the past decade, the share of personal income taken in state and local taxes in North Carolina grew. That is, the “antiquated” tax system more than just kept up with growth – it ran ahead of it. For Betts’ argument to be true, we should have seen a declining share of personal income collected as taxes, thus arguing for new ways to keep the proportion stable.
A little homework is in order, ladies and gentlemen, before poking around in this complicated area.