5/23 - Richard Rubin on Corporate Income Tax

5/23 - Richard Rubin on Corporate Income Tax

General notes:

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Announce podcast subscribe at the middle of the show (everyone asks for 5-star reviews, but I think you should just ask for honest feedback)

Main points from planning call:

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In a globalized world, money/capital walks to the most competitive locations. Higher taxes in the U.S. mean domestic workers suffer lower growth, fewer jobs, and lower productivity.
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The U.S. still has a high corporate tax rate compared with OECD nations, even after the 2017 tax cut from 35 to 28%. Yet Rubin's pinned tweet says the U.S. is a low tax country.
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Yellen's/Biden's solution to the competitiveness disadvantage is to get other countries to raise their taxes and form a cartel.

Blurb:

Bio

Richard Rubin is the U.S. tax policy reporter for The Wall Street Journal in Washington, focusing on the intersection of taxes, politics and economics. Before joining the Journal in 2015, he covered tax policy for Bloomberg News and Congressional Quarterly. He also wrote about local government and transportation policy for The Charlotte Observer. He is a native of New Jersey and a graduate of Duke University.

Videos

Corporate tax section begins at 4.5 minute mark.

There is a large disparity in income, but an even bigger disparity in taxes paid. Payroll taxes, however, disproportionately effect the less wealthy. Clever visuals... the end result is that the rich pay a higher percentage of the taxes compared with the percentage of income, and the bottom 10% pay very little in taxes relative to how much they earn.

Articles

Scott Lincicome, March 24, 2021
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Because many countries—including more “progressive” ones like Canada and Sweden—lowered their corporate tax rates over the last 40 years, the United States in the 2010s ended up with one of the highest statutory corporate tax rates in the developed world (and the highest in the OECD).

Even with lower rates, however, corporate taxes in the United States remain uncompetitive in several respects. First, the combined U.S. statutory rate is still higher than 24 of the 36 developed economies examined by the OECD, as well as the average rate in the OECD (23 percent) and Europe (21 percent) and the rates in a lot of “competitor countries” like Switzerland (15 percent), the U.K. (19 percent), and South Korea (25 percent).

the statutory rankings we read about in the press do not include U.S. taxes on dividends and capital gains, which are paid by shareholders and amount to a second layer of corporate income taxation (backgrounder here). According to Tax Foundation calculations, when this second tax is included, the top U.S. “integrated tax rate on corporate income” stands at about 47.7 percent, again ranking in the bottom third of OECD countries:
There’s also plenty of evidence that corporate taxes are a pretty lousy way to finance government operations and raise all sorts of problems. Most basically, there’s the fact that corporations, while technically paying corporate taxes, don’t bear their ultimate burden (what we call “tax incidence”). Instead, academic research shows that corporate taxes are actually paid by a combination of shareholders, workers, and consumers. A 2020 paper, for example, estimated that “the incidence on consumers, workers, and shareholders is 31 percent, 38 percent, and 31 percent, respectively”—thus showing that corporate taxes aren’t very good at taxing “capital,” and that a substantial share of corporate taxes are simply passed on through retail prices or lower wages.

Less innovation. Recent studies of the United States and China show a strong connection between corporate tax rates and firm innovation (e.g., spending on R&D, hiring high‐skill workers, filing patents, and introducing new products). In short, higher corporate taxes mean less innovation, while lower ones mean more.

The Tax Foundation adds that “[i]f the Biden tax plan were fully implemented, the U.S. rank on the Tax Foundation’s International Tax Competitiveness Index would fall from 21st in 2020 to 30th, with the corporate rank falling from 19th to 33rd overall.” It’s hard to see how this could possibly be good for attracting new companies, entrepreneurs, and investment in the United States.

Why doesnt amazon pay taxes?

In particular, Amazon lowered its taxable income in three main ways: (1) applying previous period losses (“carryforwards”), which let all companies “smooth tax payments across business cycles and a company’s lifespan”; (2) tax credits mainly related to R&D; and (3) deducting (“expensing”) business investments (e.g., cloud computing or solar farms), on which Amazon spent more than $160 billion since 2011.

As Rubin put it, “the current corporate tax system was designed by Congress to encourage investment and research and let companies realize the benefit of early losses when they become profitable.”
Richard Rubin, May 4, 2021

Who gets hurt, shareholders or workers? Estimates range from 75% shareholders, 25% workers, to 50-50.

Republicans, who controlled Congress and the White House, said workers would gain as corporate taxes declined. The idea was that those cuts would spur investment and make employees more productive and able to claim higher wages. In that view, Mr. Biden’s infrastructure spending to help workers would be funded by workers themselves.
Republicans point to wage increases and low unemployment through 2019 as evidence that Trump administration policies were working before the pandemic stopped any momentum. But it is unlikely that corporate investment flowed into wages so quickly, said Alan Viard, an economist at the conservative-leaning American Enterprise Institute.

Short term vs. long term

“This is one of the great mysteries in public finance, and so empirical estimates are people feeling around to try to figure it out,” said Mihir Desai, a finance professor at Harvard Business School. One obvious thought is that companies raise prices after tax increases, putting the burden on consumers. Most economists say there is little effect. They say companies compete for customers against entities with different tax rules, such as unincorporated businesses, limiting price changes in response to corporate taxes. Most analysts divide the corporate tax burden between capital and labor, with shareholders paying short-run costs through fewer buybacks, smaller dividends and lower share prices. Workers would get a long-run hit as companies invest less in equipment, limiting productivity gains and workers’ ability to demand wage increases.

Who bears the burden?

The Tax Policy Center, a group run by Mark Mazur until he rejoined the Treasury Department this year as a deputy assistant secretary, assigns 80% of the burden to capital. That means 35% of corporate taxes fall on the top 1% of households, which earn about 16% of total pretax income. The Tax Foundation, which favors lower rates and fewer tax breaks, says the split is 50-50. Harvard’s Mr. Desai said he thinks the split is about even. Career Treasury Department economists estimated in 2012 that capital bore about 82% of the burden, with labor shouldering the rest.

CIT is a way to tax foreigners and tax-exempt institutions like college endowments, by taxing the companies whose stock they own.

Does this count as raising taxes on people earning under $400,000?

The bottom 80% of households pay more than one-quarter of corporate taxes, according to the Tax Policy Center. The Biden administration, which says it won’t raise taxes on households making under $400,000, doesn’t consider those effects as breaking its pledge.
Theo Francis and Richard Rubin, April 5, 2021
cut into corporate profits as the economy recovers, and the Biden plan could reduce the earnings of companies in the S&P 500 by at least 10%

Supporters say the tax increase cannot be looked at in isolation. Domestic companies and American workers stand to benefit from the Biden administration’s proposal to spend more than $2 trillion on infrastructure and other improvements, said Matt Gardner, a senior fellow at the progressive Institute on Taxation and Economic Policy.

Will the taxation promote job growth? Always look for the unseen - the hiring that won't take place in the private sector.

Matthew Dickerson, April 20, 2021

What's in the tax proposal:

  • Increase the corporate tax rate to 28 percent from the current 21 percent rate;
  • Enact a new 15 percent minimum tax on book income for large corporations;
  • Seek an international agreement to impose global minimum corporate taxes that would sacrifice American competitiveness in an attempt to create a cartel of high-tax countries around the world;
  • Increase taxes on U.S.-headquartered multinational corporations, including by establishing a 21 percent minimum tax on foreign profits;
  • Repeal certain tax policies related to the fossil-fuels industry and create more corporate welfare for “green energy”; and
  • Increase funding for the IRS and increase tax-collection enforcement measures.

Heritage estimates the largest burden borne by workers:

Heritage Foundation’s Adam Michel “shows that workers bear a majority of the economic burden of the corporate income tax in the form of lower wages. Labor bears between 75 percent and 100 percent of the cost of the corporate tax.”

Why? Because money & capital can walk to other countries.

Older theoretical models that predicted that capital bore the full cost of corporate taxation relied on outdated assumptions of a simple closed economy without international investment. Since the 1960s, the economy has become much more open and competitive, and global investment is common.15 Michel, “The High Price That American Workers Pay for Corporate Taxes,” and Stephen J. Entin, “Labor Bears Much of the Cost of the Corporate Tax,” Tax Foundation, October 24, 2017, https://taxfoundation.org/labor-bears-corporate-tax/ (accessed April 11, 2021). Michel summarizes the result: In an open economy where capital can move abroad and the prices of goods are set competitively in the world market, the corporate tax has only one place to shift: to workers. When capital moves abroad, the domestic capital-to-labor ratio declines, slowing productivity and lowering wages

Tax policy will also create distortions in the energy industry. Removing some subsidies, but adding new ones.

Parker Sheppard, April 15, 2021

Good overview of the long-term effects on output and reduction in people's incomes due to slower growth.

Could introduce distortions like more S-corps instead of C-corps, with fewer shareholders (all of whom have deep pockets) depressing equities, etc.

Capitol increases worker producitivty, therefore a decrease in capital investment will reduce wages:

I use the point estimate reported by Kevin Hassett and Aparna Mathur that a 1 percent increase in the capital-to-labor ratio leads to a 0.45 percent increase in wages.
Eric Rosenbaum, May 1, 2021
Steven Horwitz

Podcasts/Videos:

Past Shows' Notes/Transcripts

Trump's policies seemed to have worked as planned – vindicating a certain kind of supply side economics. Trump reduced corporate tax rate from 40% to 21%.

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