Champions for tax reform in Washington want to help the middle class so much that they have proposed a big income tax cut for the biggest U.S. corporations. Really. And they think it’s going to work, too.
They are not just expecting a little bump for American workers, either. The Trump administration estimated that cutting the corporate tax rate from the current 35 percent statutory rate to 20 percent would, “very conservatively,” increase average household income by $4,000 per year.
Pretty sure that $4,000 figure is wildly off the mark, but I am not at all certain by how much. Based on reading some economic research, there doesn’t seem to be a firm consensus among some awfully big brains in economics on this question, either.
A much better question, of course, is why cutting big company taxes to help regular Americans seems to be favored over a simple idea like cutting payroll taxes. That may not be the best policy idea, but at least no one would have to hire a personal economist to figure out if they would ever get anything out of it.
But for now the proposal on the table has to be addressed. To be fair, it’s long been understood in tax policy that who ultimately pays the freight isn’t necessarily the group that appears to be getting taxed, and that’s true for corporations, too. The problem is that the effect of taxes on people doesn’t seem easy to precisely calculate.
For example, think about what would happen with a new, $2 per six-pack state tax on beer. Provided a riot in front of the State Capitol doesn’t spook the Legislature into reconsidering, beer buyers are going to be paying a lot more.
On the other hand, the sellers aren’t going to be getting any more money, as the price increase really went to the state. So how much of the new burden is really falling on breweries and beer distributors?
Getting to the right answer depends on careful assumptions on how much of a change in beer-drinker purchasing behavior would result from the big price increase, itself a deep-in-the-weeds exercise. But a much higher price for beer no matter the reason should reduce the amount sold in the state — and that hurts breweries and distributors.
In thinking through this example, you can understand why analysts have to ask who actually pays corporate income taxes. It’s critical to understanding what could happen to workers if cutting the corporate tax rate gets implemented.
And figuring this one out makes the analysis of the beer market look kind of easy.
One thing we know about big companies is that a suddenly lower tax bill won’t mean they will simply give all the savings to workers in the form of an across-the-board wage increase. There’s simply no reason for them to do that.
They may use the money to increase shareholder dividends or buy back stock, both obviously good for shareholders and doing little or nothing for workers. For the case for cutting corporate taxes to help workers to make any sense at all, these companies with suddenly lower taxes had better decide to invest a lot more in capital projects.
This is just a layman’s understanding of it, but the argument is that the after-tax returns on capital invested in the business will be greater. A project like a plant expansion that couldn’t quite get approved last year might this year look like an economic winner and get funded.
It’s also true with an open economic system that allows capital to flow across borders, American businesses might find it easier to find eager investors from abroad.
All the new investment will make the machines, tools and facilities used in the business better, faster and simply more productive. That makes the people working there more productive, too. And that leads to more demand for workers and to wage growth.
So how would the shareholders have made out in the meantime? Pretty well, probably. And it wasn’t that long ago that the conventional thinking in economics was that only investors would have benefited.
That would be the conclusion from a well-known stab at figuring out who incurs the pain of corporate income taxes from the early 1960s. This study concluded that owners of American capital (and not just shareholders) seem to bear the whole burden for corporate income taxes.
More recently, the credible estimates included one by the U.S. Treasury Department a few years ago that landed at 82 percent paid by owners of capital. Work by the Congressional Research Service said owners bore three-quarters of the burden, with workers carrying the rest. Whether owners take 75 percent or 82 percent of the burden of course, it’s still clear it wouldn’t be the workers getting the lion’s share of the benefits of slashed corporate income taxes.
Nonsense, according to the economist who now heads the administration’s Council of Economic Advisers, Kevin Hassett, and arrived at the $4,000 per year gain to average households.
Other economists turned over an envelope, did some math and decided Hassett seems to have concluded that workers actually bore the burden not of 80 percent or even 100 percent, but 250 percent of the corporate taxes that would be cut in this proposal.
As $4,000 per household seems like such an unlikely conclusion at the end of an economic explanation that’s so complex that just typing up notes about it brings a sharp pain to the temples, you have to wonder how genuine this whole proposal really is.
It would be so much better to see Congress take up a corporate tax plan that simplifies the system and brings it more in line with the corporate tax systems of other industrialized countries. If doing something for working families is also good policy, well, you can make that case in a single sentence.
Here goes: Working families could use a break, and a $500 per year tax cut would save them about $500.
See? That was easy.