The corporate income tax is the most poorly understood of all the major methods by which the U.S. government collects money. Most economists concluded long ago that it is among the least efficient and least defensible taxes. Although they have trouble agreeing on--much less measuring with any precision--who actually bears the burden of the corporate income tax, economists agree that it causes significant distortions in economic behavior. The tax is popular with the person in the street, who believes, incorrectly, that it is paid by corporations. Owners and managers of corporations often assume, just as incorrectly, that the tax is simply passed along to consumers. This very vagueness about who pays the tax accounts for its continued popularity among politicians.

The federal corporate income tax differs from the individual income tax in two major ways. First, it is a tax not on gross income but on net income, or profits, with permissible deductions for most costs of doing business. Second, it applies only to businesses that are chartered as corporations--not to partnerships or sole proprietorships....

The marginal tax rate is the rate on the last dollar of income earned. This is very different from the average tax rate, which is the total tax paid as a percentage of total income earned. In 2003, for example, the United States imposed a 35 percent tax on every dollar of taxable income above $155,975 earned by a married taxpayer filing separately. But that tax bracket applied only to earnings above that $155,975 threshold; income below that cutoff point would still be taxed at rates of 10 percent on the first $7,000, 15 percent on the next $14,400, and so on. Depending on deductions, a taxpayer might pay a relatively modest average tax on total earnings, yet nonetheless face a 28-35 percent marginal tax on any activities that could push income higher--such as extra effort, education, entrepreneurship, or investment. Marginal decisions (such as extra effort or investment) depend mainly on marginal incentives (extra income, after taxes)....

Economist Knut Wicksell made his name among the Swedish public with a series of provocative lectures on the causes of prostitution, drunkenness, poverty, and overpopulation. A Malthusian, the young Wicksell advocated birth control as the cure for these social ills. His image as a radical social reformer did much to attract the attention of the press and the Young Socialists with whom he sympathized. But his rejection of Marx and Marxism limited his popularity.... READ MORE