WASHINGTON, DC – FEBRUARY 05: President Biden makes remarks on his administration’s need … [+]
As the partisan struggle over President Biden’s ambitious infrastructure plan – and the tax hikes it will require – intensifies, the fate of the package will largely be determined by who is best at managing its tax hikes.
Biden plans to raise corporate taxes by about $ 2 trillion, excluding his “green energy” tax credits. The president and his democratic allies put the accent directly on the “about business” part. In contrast, Republicans want voters to focus on the phrase “raise taxes” and see Biden’s plan as a massive tax hike for workers.
Both sides will rely on exaggeration and some controversial economic theories to make their case. But while few politicians will say so explicitly, the core of the argument is well known to financial economists everywhere: the incidence of corporate tax.
Corporation tax charge
The what about the who?
It’s a variation on an old argument. In fact, it is an exact reflection of the battle for the Tax Cuts and Jobs Act (TCJA) of 2017. At that time, the battle over who would benefit from TCJA’s corporate tax cuts was over. This time it will be about who will pay Biden’s corporate tax hike.
The answer is both a question of uncertainty and economic philosophy.
They won’t be corporations themselves. They are nothing more than legal conveniences for their owners and workers. And ultimately, these workers and owners will bear the burden of these corporate tax hikes. But what share will the workers pay? And what share do the owners pay? What about other investors? And when? It can take years for corporate tax changes to show up in workers’ wages, but much less time for them to show up in a company’s stock price.
When it comes to the burgeoning political debate, the answer to these questions could play a big role.
To see how that goes, consider the recent analysis of the Biden Tax Plan by the Tax Policy Center, which includes not only the corporate tax provisions of its infrastructure proposal (the American Jobs Plan), but also the individual tax changes in its American Families Plan.
Just looking at Biden’s individual income tax and wage tax changes, middle-income households would receive a tax cut averaging about $ 650 in 2022. Almost no one would pay more taxes, and about a quarter would pay about $ 2,500 less on average.
Almost all tax increases would be paid by households earning $ 350,000 or more.
This is a story that Democrats love to tell.
But the picture will change when TPC distributes Biden’s corporate tax hikes to households. Those with the highest incomes would still pay the vast majority of the president’s tax hikes. In fact, on average, they would pay even higher taxes since they hold most of the company’s stock.
That might make the narrative a little awkward for Biden and the Democrats. On average, middle-income households would still receive a tax cut, even though it would drop to around $ 300. This is mainly because, as employees, they would bear part of the burden of these corporate tax hikes through lower wages. But for around three quarters of these households, their after-tax income would decrease compared to current law. In 2022 it would be just a few hundred dollars. But that would be enough to make an attack credible.
Republicans can make history even more dramatic by distributing a larger share of corporate tax increases to workers. TPC estimates that about 20 percent will go to employees and the remainder to return on investment, roughly in line with the careers of the Treasury Department, the Joint Tax Committee and the Congressional Budget Office. But in 2017, the Trump White House estimated that virtually all of the benefits of the TCJA’s tax cuts would go to workers, and their incomes would increase by an average of $ 4,000 annually.
An old debate
This debate is not new. Congress passed the 1986 Tax Reform Act in part because its proponents advocated it as a major household tax cut funded by a corporate tax hike. But in the end, households paid for these corporate tax increases.
It’s hard to say how the political battle will end this time around. In general, Republicans are much better than Democrats at the tax war. But most voters – even Republicans – believe that high-income households and businesses should pay more taxes.
And instinctively, non-economists don’t think they’re paying corporate taxes. That may have been one reason they gave the GOP little credit for lowering their taxes in the 2017 TCJA, when it did.
This year’s version of the same debate could determine the fate of Biden’s infrastructure plan and a possible follow-up to fund initiatives to support families with children and frail older adults. Just don’t tell anyone it will be about corporate tax incidence.