Back in my business magazine days (the end of which begat this blog) I argued that businesses don’t pay taxes; business’ customers pay taxes.
Ryan Young proves I was right then and now:
A mammoth infrastructure bill is on the way from Congress, and policy-makers are touting a corporate-tax-rate hike to help pay for it. Treasury secretary Janet Yellen even proposed a global minimum corporate-tax rate this week. These are both bad ideas for three reasons.
First, corporations do not pay any corporate tax — individuals do. That is because companies pass on their costs. Some of the tax is paid by consumers, who pay higher prices. Company employees pay some of the tax through lower wages. And investors’ retirement accounts pay some of the tax through lower returns.
So, while it might be good politics to stick it to big corporations — or at least to posture that way in front of voters and television cameras — a corporate tax-rate hike would not accomplish its intended goal. Instead, taxes are paid by individuals who then get less for their money, receive smaller paychecks, and have a harder time saving for retirement.
In a 2020 study by Scott R. Baker of Northwestern University, Stephen Teng Sun of City University of Hong Kong, and Constantine Yannelis of the University of Chicago estimate that 31 percent of the cost of an increase in corporate taxes is borne by consumers, 38 percent by workers, and 31 percent by shareholders, or about a third each. Other studies have found different ratios. A 2020 Tax Policy Center study, a joint effort between the Urban Institute and the Brookings Institution, estimates an 80–20 split between investors and labor. The Tax Foundation’s Stephen J. Entin estimated in 2017 that labor pays 70 percent or more of the corporate tax. Differences aside, these studies share a common conclusion: Ultimately, corporations themselves pay no corporate tax.
A second problem involves Secretary Yellen’s proposed global minimum corporate-tax rate. She floated the proposal this week at an IMF/World Bank spring meeting in Chicago and would like to have an agreement among G20 countries by July.
For decades, the U.S. long had one of the world’s highest corporate-tax rates, at 35 percent. Former President Trump cut the rate to 21 percent, which is close to the global average of 23.85 percent. A global minimum tax would excuse the U.S. from competitive pressure to make further cuts by giving companies fewer tax havens to which they could flee.
A third problem is that a global minimum corporate-tax rate would open up a fresh rent-seeking opportunity for U.S. corporations — rent-seeking being economists’ term for getting special government favors.
It is not difficult to imagine a U.S. company lobbying heavily to raise its rivals’ taxes in lower-tax countries. This would make the U.S. company more competitive, but in strictly relative terms. Such a lobbying win could aid a company without it having to do the hard work of improving its products or offering consumers better deals.
At the same time, though, foreign companies could lobby to raise U.S. corporate-tax rates for similar reasons. Why bother improving your own company when you can just hurt your rivals instead? That is the real race to the bottom.
The federal government has already amassed a debt larger than America’s annual gross domestic product. The new administration has already increased that burden with a $1.9 trillion COVID spending bill and is proposing to add even more debt over the next 15 years with an infrastructure spending bill of at least $2 trillion.
The revenue to pay for these projects should be raised honestly and transparently. Individuals pay all corporate tax, but its cost is hidden: It never shows up as an item on their shopping receipts, paychecks, or investment statements the way sales taxes and other fees do.
That explains the corporate tax’s political appeal. So does its mistaken “sticking it to the big guys” image. But it is a false image. If lawmakers want something funded, they should tax people directly, so we can better see the connection between what we pay to the government and what we get from it in return.
Of course, that would require honesty on the part of government and politicians.
Garion Frankel adds:
Not only has President Joe Biden threatened to eliminate former President Donald Trump’s signature Tax Cuts and Jobs Act of 2017 — which a National Association of Manufacturers (NAM) news release found significantly increased manufacturing jobs, wages, spending and output by the end of its first year in place — but Biden has also pledged to bump corporate taxes up to 28 percent.
In addition, Biden is committed to increasing marginal tax rates, removing the 20 percent pass-through deduction and much, much more. All of this would be a betrayal to the American people who have suffered so much in the past year — a position shared by leading political figures.
The results of such actions, according to a new study by Rice University economists John Diamond and George Zodrow, would be nothing short of disastrous.
If Biden’s tax plan goes through, one million American jobs would be lost in the first two years alone, the study noted.
Furthermore, our gross domestic product would decrease by $117 billion dollars by 2023, $190 billion by 2026 and $119 billion by 2031. Investments in equipment and structure would also substantially decrease.
Needless to say, the reaction from industry leaders has been less than positive.
NAM President and CEO Jay Timmons said, “As we slowly emerge from the economic catastrophe caused by COVID-19, American businesses are at a pivotal point in our nation’s history. Manufacturers can, and should, lead the economic recovery in the wake of the pandemic,” according to the NAM news release.
“But this study tells us quantitatively what manufacturers from coast to coast will tell you qualitatively: increasing the tax burden on companies in America means fewer American jobs. One million jobs would be lost in the first two years, to be exact.”
“We should be building on that progress, not rolling it back,” Timmons continued. “But the conclusion of this study is inescapable — follow through with tax hikes that give other countries a clear advantage and we’ll see far fewer jobs created in America.”
Author and investment analyst Jared Dillian agreed.
In an Op-Ed for Bloomberg, he argued, “Biden’s plan will only collect about $3.2 trillion over 10 years, after accounting for dynamic scoring, which is a pittance relative to the current $3 trillion federal budget deficit. The unfortunate thing is that if the government was really interested in boosting revenue, it would have to raise taxes on the middle class, but that is a political third rail.”
“If Biden’s plan passes, our marginal income tax rates would become grotesque, with a hypothetical couple paying 24% in taxes on incomes up to $320,000, rising to 51% on $408,000 in income if that couple is self-employed. The U.S. has enjoyed strong rates of business formation, but that wouldn’t last very long if Biden becomes president and his tax plan becomes law.”
All in all, it’s abundantly clear that Joe Biden has no interest in being the moderate he claimed he was on the campaign trail. Instead, he seems intent on sacrificing the jobs of the Americans who voted him into office on the altar of radical spending plans.
This is not the America that was built to greatness through ingenuity and free enterprise. It is spending for the sake of spending, and it will be completely unsustainable in the long-term — on top of the so-called “stimulus” that has already been passed.
Nobody likes to get off the spending train, especially when it has only begun to speed away from the station, but it is a necessity if our country is to survive. American taxpayers deserve better governance, and they deserve to keep their jobs.
