Milton Friedman on corporate taxes

All too often, the policy debates of today are simply refights of the battles of yesteryear. Because of this, old arguments often retain a modern relevance.

Milton Friedman was an economist with a rare gift for translating technical arguments into clear prose (as you will find in his books Capitalism and Freedom and Free to Choose). In a week when Gov. Mark Dayton vetoed the tax bill because it supposedly “put powerful special interests, multinational corporations, and the rich ahead of Minnesota schoolkids and families,” here is Friedman in a Newsweek column from November 1971 explaining why that argument was wrong then and is wrong now.

President Nixon’s proposals for reductions in taxes have been widely criticized as a “help-the rich” program “heavily weighted in favor of business at the expense of the individual taxpayer.”

This criticism is sheer demagoguery. The elementary fact is that “business” does not and cannot pay taxes. Only people can pay taxes. Corporate officials may sign the check, but the money that they forward to Internal Revenue comes from the corporation’s employees, customers or stockholders. A corporation is a pure intermediary through which its employees, customers and stockholders cooperate for their mutual benefit. A corporation may be large and control large amounts of capital. Yet it does not follow that a reduction in the check it sends to Internal Revenue benefits wealthy individuals.

Indirect effects make it difficult to know who “really” pays any tax. But this difficulty is greatest for taxes levied on business. That fact is at one and the same time the chief political appeal of the corporation income tax, and its chief political defect. The politician can levy taxes, as it appears, on no one, yet obtain revenue. The result is political irresponsibility. Levying most taxes directly on individuals would make it far clearer who pays for government programs.

John Phelan is an economist at the Center of the American Experiment.