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President Joe Biden is seeking corporate tax increases, which means companies will pay higher taxes on their profits. You might think that increasing this tax rate won’t have much of an impact on your bottom line – but according to some economic analysts, this is far from the truth.
Here’s what you need to know.
What’s wrong with corporate taxes?
The corporate tax rate is a political issue and a key part of former President Donald Trump’s economic agenda when he brought it down to its lowest level since 1939 in 2017. One of the current priorities of the Biden government is to change corporate taxation.
President Biden proposes raising the current corporate income tax from 21% to 28% and preventing US corporations from paying little to no taxes now.
How will higher corporate taxes affect you?
Since it is aimed at businesses on the surface, a corporate tax increase may not seem relevant to the average American consumer, but it could affect you and your finances.
The Tax Foundation, an independent not-for-profit nonprofit organization, reports that consumers and shareholders “bear a significant portion of the corporate tax burden.” The report refers to a study of German municipalities over a period of 20 years that found that higher corporate taxes actually lowered wages for low-skilled, young and female workers.
These demographics are already well behind their counterparts – especially white men – in terms of wages. For example, according to the Pew Research Center, women in the United States made 84% of what men made in 2020.
However, the Center on Budget and Policy Priorities (CBPP), a non-partisan research and policy institute, notes that productivity and wage growth in the US have been strongest since World War II, during a period of high corporate taxation. This is not to say that high corporate taxes result in high wages; rather, at least historically, they are not opposed to high corporate taxes.
However, it is not just wages that are affected by higher corporate tax rates. The Tax Foundation also points to a 2020 paper that estimates that a 1 percentage point increase in the corporate tax rate will increase retail prices by 0.17%.
“The impact on prices has been greatest for products that were more likely to be bought by low-income households, suggesting that corporate tax is likely to be less progressive than is commonly claimed,” the tax foundation’s report said. This means that the assumption that increasing corporate taxes will help empower those neglected by the US social and economic system may not be entirely correct.
But it is not only low-income consumers that can be negatively affected by higher corporate taxes. As higher taxes will reduce profitability and hurt demand for stocks, those with investment and retirement accounts can experience decreased performance. CBPP reiterates and extends this statement: Wealthy shareholders with highly concentrated ownership of corporate stocks would likely bear the brunt of higher corporate taxes if stocks suffered decline due to falling revenues.
Still, governments are pushing for higher tax rates on the assumption that they will generate enough income to fund larger investments. Profit shifting, the practice of these companies shifting their income overseas for lower tax rates, costs US dollars every year. Lawmakers, including Biden, are pushing for corporations to pay “their fair share” of taxes after decades of wealth while the middle class stagnates. Overall, Democrats believe that the benefits of increasing corporate taxes outweigh the burdens it could incur.
When do higher corporate taxes come into effect?
Because he has promised not to levy taxes on anyone earning less than $ 400,000, Biden will raise corporate taxes to fund most of his grand social reform and infrastructure investment plans – and is working to make that happen.
Although Biden had campaigned for his tax reform plans before he took office, the government still faces hurdles in turning the proposal into law. Republicans have opposed the idea of tax increases and are confronting lawmakers with the dilemma of figuring out how to fund Biden’s infrastructure plan.
However, the Democrats recently agreed on a price for the plan, which could include language that would protect individuals below $ 400,000 and small businesses from tax hikes, both of which were part of Biden’s campaign promises. The language, however, could open the door to a corporate tax hike in the bill – or in the near future.