The Basil Fawlty theory of corporate taxes

Fawlty Towers is one of the best television shows ever. It ran for 12 episodes, and each is a highly-polished gem. One of my favourites is the episode ‘Gourmet Night’, in which Basil Fawlty – the incomparable John Cleese – tries to increase the tone of his run-down hotel. At a crucial point, Basil’s car breaks down, thus dashing his dreams of toadying to a higher-class clientele. This sets the scene for one of the best rants ever recorded:

 

So what does this have to do with corporate tax policy? As far as I can tell, the usual explanation for wanting to increase corporate tax rates (or for opposing attempts to reduce them) makes use of the following reasoning:

1. Corporations are responsible for many objectionable activities.
2. Increasing corporate tax rates will make life difficult for corporations. 
3. Conclusion: Increasing corporate tax rates will reduce corporations’ tendency to indulge in objectionable activities.

The crucial step missing in this line of reasoning is of course an analysis that concludes that increasing corporate tax rates will reduce a corporation’s tendency to indulge in bad behaviour. And arguments based on the belief that rich people will bear the burden of corporate taxes are misplaced: corporate taxes are not progressive. (See also here , here and especially here.).

Which brings me back to Basil Fawlty. Anyone who has even the shakiest understanding of how an automobile works knows that bashing a car’s hood with a stick will not make it run any better. You may understand Basil’s rage, but your reaction will most definitely not be: “Hey, he’d make a great mechanic!”

It seems to me as though too many people (yes, I'm looking at you, NDP) view corporate tax rates in the same way as Basil viewed that stick.

Comments

[Robert McClelland]

I've never heard that kind of reasoning for increasing corporate taxes before. Do you have evidence of anyone using it?

[Josh]

I think the more common justification is simply to "make corporations pay" under the delusion that such costs don't affect workers and customers alike. Much better would be to (a) bring the GST back to 7% with an expanded rebate program and (b) add an extra high income tax bracket, keeping in mind that personal capital gains are income like anything else.

[Robert McClelland]

I think the more common justification is simply to "make corporations pay"

That sounds a lot more familiar.

under the delusion that such costs don't affect workers and customers alike.

No, under the reality that corporate tax cuts don't benefit workers and customers alike.

[Josh]

Well, either corporate profits are being paid out in dividends and bonuses - in which case they're taxed like income - or they're reinvested back. Corporations aren't people, and raising corporate taxes is like bringing back the manufacturers' sales tax as an alternative to raising the GST. Either way, we still pay for it, but some ways of paying are better and more efficient than others.

[Ian King]

New Democrat Bill Tieleman offers up a similar argument against cutting corporate taxes while complaining about how most pundits rubbished Layton.

Memo to the NDP: value judgments about Wall Street don't address the effect of corporate taxes on investment and wages, and economic ignorance won't help you benefit the working class.

[Andrew]

Reminds me of something Churchill said:

"Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon."

[Stephen Gordon]

I've never heard that kind of reasoning for increasing corporate taxes before.

You've heard of others? Do tell.

[Stephen Gordon]

That's okay. It's not as though you had a point.