Politics & Policy

Corporate Tax Cuts Would Benefit Ordinary Americans

(Photo: Chillchilllanla/Dreamstime)
Evidence suggests that lower corporate-tax rates increase GDP and boost worker wages.

Cutting the corporate income-tax rate seems a rare area of consensus for Republican lawmakers considering tax reform, which is good news for working Americans. Despite opponents’ attempts to suggest otherwise, there is reason to be confident that cutting the corporate tax rate will raise the wages of millions of workers.

How can this be? Progressive groups like “Americans for Tax Fairness” paint corporate tax cuts as a giveaway to wealthy corporations and their shareholders, which will reduce government revenues and, in time, lead to fewer government services for the poor. This messaging seems to resonate with the public. Yesterday, a WSJ/NBC poll found that 55 percent of Americans wanted to increase taxes on corporations and another 25 percent wanted to keep such taxes as they are.

Corporations might “pay” the corporate tax in a legal sense. But its cost is ultimately borne by some combination of shareholders (through lower dividends or less valuable shares), workers (through lower wages), and consumers (through higher prices). Economists have argued for decades about how big a share of the tax burden each group absorbs, with different results depending on assumptions about the openness of the economy, the mobility of capital, the degree of competition in labor markets, and a host of other factors. More recent empirical work suggests that workers and shareholders share the brunt of the tax, with the former often taking a much bigger hit than the latter.

An E.U. Study in 2007 found, for example, that “a ten percentage point increase in the corporate tax rate of high-income countries reduces mean annual gross wages by seven percent.” A 2009 National Bureau of Economic Research paper analyzing American corporate-tax rates at the state level found that “workers in a fully unionized firm capture roughly 54 percent of the benefits of low tax rates,” while a more recent analysis found that workers overall bore 30–35 percent of the burden. A 2015 study from Germany indicated “that workers bear about 40% of the total tax burden,” though it acknowledged that this was likely lower in companies with profit-sharing arrangements. The Congressional Budget Office has even estimated that the proportion of the corporate income-tax burden borne by labor could be more than 70 percent.

It makes sense that workers would be hurt by high corporate-tax rates. A lower corporate rate leaves more after-tax profits for firms and workers to bargain over, which can raise wages directly. And lower rates increase a company’s after-tax return on investment, encouraging investment relative to consumption. This helps raise capital per worker and hence boosts productivity and wages over time.

At best, then, corporate income taxes are a stealth tax on workers. At worst, they are an investment-sapping, highly distortionary capital tax. It would be better to reduce or eliminate them and raise revenues in other ways, particularly for the U.S., where the combined federal and state corporate income-tax rate is almost 40 percent, way higher than the 25 percent OECD average.

Some Democrats are understandably concerned that large tax cuts will substantially worsen America’s fiscal position and lead to cuts to spending programs that help the poor. President Trump has talked of an ambitious plan to get the corporate rate as low as 15 percent. Certainly, in public most Republicans seem to be angling for 25 percent or below.

While such large cuts would lead to an immediate revenue shortfall, the difference could be at least partially made up by eliminating damaging deductions and exemptions in other parts of the federal tax code. A corporate rate cut could also be expected to broaden the tax base, further offsetting its own costs by spurring more investment, the repatriation of profits, the relocation of business headquarters, and a reduction in tax evasion. Britain and Canada, in particular, have shown that it is possible to substantially cut rates without meaningfully reducing corporate revenues as a proportion of GDP.

The key point is that high corporate income taxes are widely viewed as an economic hindrance by economists. Congressional Republicans are constrained, of course, by Senate reconciliation rules, which mandate that they must reduce spending substantially, or eliminate loopholes, to enable big tax cuts. But cutting the corporate-tax rate in itself will increase GDP, and evidence suggests it will lead to higher wages for workers, too.

    READ MORE:

    Republican’s irresponsible Tax Cut

    Trump Tax Cuts are Coming Soon

    Tax Cuts are Tax Reform

Ryan Bourne holds the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.

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