TCS Daily

Superfools on Superfund

By Michael Feroli - May 16, 2002 12:00 AM

Ronald Reagan was fond of saying "Things don't pay taxes, people pay taxes." As unremarkably obvious as that statement may sound, the essential insight is consistently lost on many.

And once again this simple concept has stumped some of our nation's brightest journalists. At issue is a recent decision of the Bush administration concerning Superfund, the EPA program for cleaning up hazardous waste sites where the original polluter cannot be identified or is no longer in business. The president's proposed policy change calls for paying for the costs of Superfund out of general revenue rather than through a special corporate tax, as was previously the case. The reaction to this decision was an outburst of articles declaring that clean-up costs are shifted "from industry to taxpayers" (NYT, 2/24/02). But since the particular policy change didn't alter the total amount of tax revenue to be raised, one is left to wonder how the cost of Superfund is suddenly transferred to taxpayers. In other words, who else pays taxes but taxpayers?

Of course, corporate taxes are ultimately paid by someone rather than something. Nevertheless, some in the Senate believe the administration's decision is worth revisiting. If, for the moment, we presume that members of the Senate understand the truth in Reagan's little saying better than the Times does, then what could be the cause of their consternation? A clue to their thinking might be found in a recent column in the Atlantic Monthly by Jack Beatty. According to Mr. Beatty, the Superfund decision was yet another example of the Bush administration's philosophy: "to those whom much is given, more is given." Shifting Superfund clean-up costs from corporate taxes to general revenue shifts the burden from the average man to "the few, the powerful, the connected." This, then, seems to be the problem: Bush's policy transfers wealth from the poor to the rich.

But is this really the case? To answer this we need to turn to the study of what is known as "tax incidence," a euphemism for who gets stuck with the bill. In an early study of corporate taxes, the economist Arnold Harberger concluded that capital owners, as opposed to laborers, will end up bearing the majority of the tax burden. Later works demonstrated that in an economy open to international markets, laborers will ultimately end up footing the tax bill (because capital will flee to other, less heavily taxed, destinations). Not surprisingly, the academic work is inconclusive, although the consensus suspects that corporate taxes hit capital owners harder than laborers

If we give critics like Mr. Beatty the benefit of the doubt and place all the burden of corporate taxes on capital (which is more concentrated in the hands of "the connected") then how will the corporate tax burden be distributed? In a 1999 study, the Treasury asked just that question and concluded that the poorest two-fifths of households (those earning less than $35,000 annually) pay 4.6% of total federal taxes and 5.4% of corporate federal taxes. So, the poorest 40% of households is actually better off when federal activities are financed out of general tax revenue than out of corporate tax revenue.

This result may seem striking and counterintuitive given that capital wealth (and capital income) is highly concentrated among the richest. What little capital the poor have, however, is burdened by corporate tax at the same rate as capital held by the rich. This in contrast to labor income, which, though less highly concentrated, is taxed progressively.

Another way of putting it is that placing the burden of Superfund on corporations may, in fact, be a "soak the rich" strategy some wish it to be, but then placing the burden on general tax revenue is also "soaking the rich." The reason is simply that general revenue is already raised in a very progressive manner.

All this isn't meant to say which Americans should bear the costs of Superfund, but rather a plea to exercise more judgment in the way we talk about these policy changes. Once we look under the veil of the "corporate illusion" we see that the recent administration decision actually isn't screwing the Willy Lomans. Rather, the little guy is probably better off when the "taxpayer" pays for Superfund.

The author is an economist living in New York and Washington.

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