Why advocates of the president’s ‘Made in America Tax Plan’ get the story wrong.
Why advocates of the president’s ‘Made in America Tax Plan’ get the story wrong.
T he Biden administration’s proposal to increase taxes on American corporations rests on three politically expedient but misleading claims: (1) The share of income enjoyed by American workers has been steadily declining; (2) the tax burden on U.S. businesses has been too low, casting us out of step with global norms; and (3) the 2017 Tax Cuts and Jobs Act (TCJA) made it more profitable for companies to flee overseas. Let’s consider each argument in turn.
First, the administration points to a decline in the labor share of gross domestic income (GDI). In using this metric, however, it ignores that some of what is counted in that measure does not actually accrue to labor or capital.
GDI counts wages, salaries, and nonwage benefits, such as health insurance, as labor income. Capital income, among other things, includes proprietor’s income, corporate profits, interest income and miscellaneous business payments, and housing income.
But the next two categories of GDI are less straightforward. Taxes on production and imports and consumption of fixed capital (i.e., depreciation) should not be counted as adding to either capital or labor because income from those categories does not end up in people’s pocketbooks. These dollars are either paid directly to the government in taxes during the production process or used to replace worn-down assets.
And over the past several decades, depreciation has accounted for a growing share of GDI, rising from about 10 percent in 1929 to nearly 17 percent in recent years. This money being set aside to replace worn-down assets or obsolete technology does not add to capital or to labor — it must be excluded, along with production taxes, to get an accurate picture of how net income is split between labor and capital.
Adjust for taxation and depreciation, and you’ll find that, far from a decades-long decline in labor share, the shares of net income going to labor and capital have not changed substantially over more than 90 years. The capital share of net income averaged 30.8 percent between 1929 and 2020, versus 31.1 percent in 2020, while the labor share averaged 69.2 percent between 1929 and 2020 versus 68.9 percent in 2020.
But the Biden administration’s Made in America Tax Plan primarily cites measures of the gross share, meaning the historic low labor share of income it points to is largely attributable to increasing depreciation — not to capital taking a bigger piece of the pie.
That is not the administration’s only flawed argument. It also cites declining shares of corporate-tax revenue as a share of gross domestic product (GDP) without taking into account the large and growing pass-through business sector in the United States. (The latter essentially consists of businesses that are taxed on individual tax returns, such as S Corporations, sole proprietorships, or partnerships.)
Factoring in the taxes paid by all forms of businesses reveals that collections are within their historical norm. Total business tax collections averaged about 2.5 percent of GDP between 1980 and 2018 when including taxes paid by pass-through firms as well as by traditionally defined corporations. While the average taxes paid by C corporations dropped over that time, tax collections from pass-through firms rose. That phenomenon is a reflection of both the growth in the number of pass-through firms and in business income earned by pass-throughs over the past 40 years.
Business tax collections totaled about 2.1 percent of GDP in 2018, reflecting a decrease due to the TCJA but nevertheless remained close to the historical average of 2.5 percent. Over the next few years, business tax collections will likely rise even closer to the historical norm prior to any Biden tax increase as the timing effects of provisions such as bonus depreciation fade and as other base broadeners take effect.
The call for higher corporate-income taxes also implies that the current federal corporate-tax rate of 21 percent is low compared with other nations. But that ignores that most U.S. states impose their own corporate-income taxes, leading to a combined average rate of about 25.8 percent. That combined rate is slightly above the OECD average, excluding the U.S. Measures of effective tax rates similarly show that ours are currently at or above those of peer nations. Raising the corporate-income-tax rate from its current level would make us the outlier.
Lastly, the administration has developed convenient narratives about the U.S. international tax system to advocate higher taxes on multinational firms.
Critics contend that the TCJA increased incentives for offshoring; yet those claims do not align with the way the new law works in practice: The TCJA made investment in the U.S. much more attractive for companies while leaving the effective tax rate on foreign-earned profits largely unchanged. While the new international tax system is not flawless, its problems tend to inflate the tax burden on foreign income, not favor it.
The Made in America Tax Plan would make U.S. tax policy an outlier on the global stage, increase the cost of production in the United States, and burden workers across the income spectrum. The arguments in favor of that misguided policy get the story wrong.