Spotted at Marginal Revolution - a proposal by Scott Sumner:
Replace the corporate tax with a payroll tax of x% on everyone making more than $100,000/year. Have x% be the tax rate that replaces the lost corporate tax revenue. That would help the poor, it would help the middle class, and it would help the rich. What’s not to like?
Decrease the general corporate tax rate from 15% to 14%. Increase the top income tax bracket (over $132,406) from 29% to the level needed to make the move revenue neutral. Someone more adept with SPSD/M than I should be able to calculate the rate needed without too much trouble.
I am not seeing a lot of downside to the policy, though I may be missing something. The tax system would become more progressive with the move. Since we are not cutting the small business rate, the self-incorporation problem should not be much of an issue. Naturally there will be a deadweight loss associated with a rise in the top bracket of personal income taxes, but this will be more than offset from the efficiency gains from a lower corporate income tax rate.
This proposal differs in one important respect to Sumner's - in his proposal, only labour income would see a rise in tax rate. Under my proposal, the capital gains rate would also increase by 0.5*x%, as in Canada the capital gains rate is one-half of the rate for 'other income'.
Overall it appears to be a pretty good idea, though I worry about unintentional consequences that I am not seeing (which is one of the reasons why I tend to prefer incremental policy change). It would not be my first choice for a corporate income tax swap; I would prefer to see a dollar-to-dollar swap of lower corporate income tax rates for lower corporate welfare. But this may be my second choice. Thoughts?
And on the topic of income tax rates, Kevin Milligan has a new paper: The design of tax policy in Canada: thoughts prompted by Richard Blundell's ‘Empirical evidence and tax policy design’