Corporate Tax

Biden Company Tax Hike will not spare the center class

Michael R. Strain is a columnist for the Bloomberg Opinion. He is the Director of Economic Policy Studies and Arthur F. Burns Fellow in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

Read more opinion Follow @MichaelRStrain on Twitter

Photographer: Adam Glanzman / Bloomberg

Photographer: Adam Glanzman / Bloomberg

President Joe Biden is reportedly considering the first major tax hike in several decades. It will not be clear whether higher taxes are worth paying until more is known about the spending programs that would fund them.

However, it’s not too early to say that at least one aspect of Biden’s approach is wrong: the promise to leave middle-class taxpayers alone.

A leading White House economist made it clear on Monday that Biden does not intend to charge anyone who earns less than $ 400,000 a year. At the same time, the White House is likely to push for a higher corporate tax rate. These goals are incompatible. As the corporate rate rises, middle class incomes will fall.

The corporate income tax rate was reduced from 35% to 21% under the 2017 Tax Act. Biden is considering an increase to 28%. While it is tempting to wish faceless corporations like corporations to shoulder the burden and save individuals the pain, in reality corporate taxes are always funded by people. The only question is which one.

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Economists used to believe that the burden of corporate taxation was borne almost exclusively by the owners of capital in the form of lower stock prices or, for example, smaller dividend checks.

This view became obsolete as it became easier for capital to cross national borders. In contrast, workers are much less mobile internationally. This makes them more vulnerable when entrepreneurs are forced to levy higher taxes on their business income.

A higher corporate rate lowers the after-tax return on additional investments. Less investment makes workers less productive, which in turn makes them less valuable. When workers are less valuable, companies will put less effort into attracting and retaining them, putting pressure on starting salaries and stifling wage growth. The burden of the corporate tax increase would therefore fall on workers in the form of lower wages.

Like any economic theory, this one too has holes. To the extent that corporate profits are generated through, for example, a brand name rather than additional investment, a higher tax rate is unlikely to lower wages. But theory is the place to start.

The idea that wages go down when corporate taxes go up is the consensus view of economists. The Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution) assigns 20% of the corporate tax burden to employees in its economic models. The Impartial Congressional Budget Office concludes that workers bear 25% of the tax burden.

The loud and heated debates over the 2017 Tax Act will now make it more difficult to clarify the pros and cons of Biden’s proposal, as both sides of that debate withdrew to political discussion points that temporarily curtailed economic knowledge.

It takes time for a change in corporate rate to affect wages, but proponents of the 2017 cut argued that wages and incomes would rise rapidly. Some companies have chosen to recognize the 2017 law in issuing one-time bonuses in late 2017 and 2018, rather than the tight labor markets that actually drove them. Opponents pointed to share buybacks, argued that companies were not spending their tax savings appropriately, and ignored the crucial fact that the mechanism by which tax changes affect wages is to change incentives for future behavior.

This misleading debate will influence Biden’s attempt to raise the corporate rate. However, the conversation is further distorted by former President Donald Trump’s trade wars. Proponents of the corporate rate hike proposed by Biden will argue that the 2017 cut didn’t boost investment or wages. That argument would be much less convincing if Trump had not restricted investment through his trade policy, which was designed to reduce business spending, while the 2017 Tax Act encouraged it.

However, the quality and winner of the policy debate won’t change the fact that if Biden increases the company’s rate, wages for workers – including those on incomes below $ 400,000 – will fall. That’s just one reason not to. Future prosperity will be strengthened if the US continues to be viewed as a place for companies to set up and do business. A tax rate that is at least as low as in Europe and most other advanced economies is one way of ensuring the US remains competitive globally.

When you tax something, you get less of it. Does the US want less corporate income? I do not believe that.

Biden’s suggestion to pay for new expenses instead of paying them with more debt is refreshing and laudable. But, Mr President, please look elsewhere to increase revenue.

This column does not necessarily reflect the views of the editors or Bloomberg LP or its owners.

How to contact the author of this story:
Michael R. Strain at mstrain4@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net

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Michael R. Strain is a columnist for the Bloomberg Opinion. He is the Director of Economic Policy Studies and Arthur F. Burns Fellow in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

Read more opinion Follow @MichaelRStrain on Twitter

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