The Democrats are at it again. Another day, another trillion-dollar tax increase.
This time it is the faltering former frontrunner, Joe Biden, pitching nearly $1 trillion in new corporate taxes over 10 years to pay for healthcare, climate change, and other requisite gimme gimmes of the Democrat Way. This, on top of $2.2 trillion in previously announced Biden tax hikes.
The latest Biden plan would raise the corporate income tax rate to 28% from President Trump’s 21% (that’s a 33% increase), establish a new minimum tax on companies with over $100 million a year in profit (to raise $400 billion from 300 companies in a decade), and double to 21% the tax rate on profits held overseas (to raise $300 billion).
Not to worry, right? A tax on corporations is, at least, not a tax on the people, so the argument goes. Make companies pay for it.
It may be galling to some that Amazon.com can earn billions in profits and end up paying scant income tax because of legally allowable deductions for research and development, employee stock plans, and other expenses. But those are the rules, and every company should use them to their utmost advantage, legally.
The bigger problem is that, in reality, a tax on corporations is really a tax on their workers: it comes out of their paychecks. Companies end up paying the government instead of investing those sums in expanding production, acquiring businesses, and paying higher salaries, bonuses, raises, and benefits to their employees.
“The preponderance of evidence shows that the corporate income tax harms workers through lower wages,” notes a convincing report by the Heritage Foundation. Workers bear 75% to 100% of the revenue cost of corporate taxes.
Thus, for every increase in business taxes which Joe Biden and the Dems want to impose, it will result in pretty much that same amount of money in reduced wages and benefits for their employees. This happens when government siphons off corporate capital that otherwise could have been invested in the companies and their work force.
Support for corporate income taxes traces back to the early 1960s and economist Arnold Harberger, then at the University of Chicago. In a seminal paper published in 1962, he argued that, because the U.S. economy was self-contained and capital had nowhere else to flee, raising taxes on businesses would affect mainly the owners of capital (investors), who had no other choice but to take the hit. Labor’s wages would remain constant.
In the ensuing decades, that argument lost ground as the world became more interconnected, and capital flows stretched far beyond U.S. borders. Investors and companies had new options for withdrawing their capital from the U.S., which had the highest corporate tax rates in the world, and reinvesting it in nations with lower rates.
“Due to this dynamic, in the open-economy model where capital can escape high tax rates, labor bears the full burden of the corporate tax,” the Heritage Foundation states. This may be one of the reasons why wages have risen at only a poky pace, barely keeping up with inflation for the last 30 years.
To his credit, the economist Harberger reversed his argument after revisiting the issue in 1995 and again in 2008. He found that in the more open global economy, workers “must end up bearing more than the full burden of the tax” (italics his), amounting to as much as 250% of the total collected by government. That's 250%!
Alas, politicians — especially the Democrats — tell the Big Lie that only corporations will endure the impact of higher business taxes. In truth, we all would feel the damage, especially seventy million people (45% of the U.S. work force) employed by large companies (those with more than 500 workers).
Instead of increasing corporate tax rates, we should be cutting them further (to 15% from 21% now) or eliminating them entirely — to help American workers. Since President Trump and the Republicans cut corporate tax rates in 2017, we have seen wages rising at a higher rate than they have in years, especially at the lower end of the pay scale.
“Contrary to the claims that a corporate tax cut is a tax cut for the rich, a 20-point reduction of the corporate income tax cut to 15 percent could boost the relative market incomes of the poorest Americans by more than twice the increase for the richest,” states the Heritage Foundation report, published in 2017 by senior policy analyst Adam Michel.
“A tax cut for corporations is therefore a tax cut for the average American.” And a tax increase on corporations is a tax increase on the average American. Amen.
Dennis Kneale is a writer and media strategist in New York. Previously he was an anchor at CNBC and at Fox Business Network, after serving as a senior editor at The Wall Street Journal and managing editor of Forbes. He helped write “Wealth Mismanagement: A Wall Street Insider on the Dirty Secrets of Financial Advisers and How to Protect Your Portfolio,” by Ed Butowsky, published in August 2019 by Post Hill Press. To read more of his reports — Click Here Now.
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