In the latest flurry of policy proposals that seem more rooted in populist rhetoric than economic knowledge, President Joe Biden’s budget plan to raise the corporate income tax rate from 21% to 28% strikes me as particularly misguided. This move, apparently aimed at ensuring a “fair share” of contributions from American multinationals, is a stark testament to a type of simplistic and all-too-common economic thinking that already hampers our nation’s competitiveness, stifles innovation, and, ultimately, it penalizes the average consumer. American worker and consumer.
Beyond the president’s class warfare rhetoric, the desire to get his hands on more revenue is one factor behind the proposal. Biden likes to pretend to be some kind of deficit cutter, but his administration is the mother of all big spenders. He is seeking $7.3 trillion next year without acknowledging the impending Social Security default or addressing what will happen when Congress makes the Republican tax cut permanent in 2025 for people earning less than $400,000 a year .
Unfortunately, no fiscally irresponsible budget is complete without appeasing individual taxpayers by promising to tax corporations. Never mind that the burden of corporate income tax increases is not borne by corporations. True, companies write checks to the IRS, but the economic burden will be partially or completely shifted to others, such as workers through lower wages, consumers through higher prices, or shareholders through lower investment returns. That means many taxpayers earning less than $400,000 will bear the cost of the corporate tax increase.
It is worth delving into that much of the corporate tax increase will be borne specifically by workers. A recent article from the Tax Foundation, for example, explains that “a study of corporate taxes in Germany found that around half of the tax burden is passed on to workers in the form of lower wages, while low-skilled, young and female employees are disproportionately harmed.”
Biden’s planned tax increase would certainly increase revenue. Kyle Pomerleau of the American Enterprise Institute told me he would raise about $1 trillion in a decade. However, he will do so in the most damaging way possible.
Indeed, it is well established in the economic literature that raising corporate taxes is the most economically destructive method due to its impact on investment incentives. Investments that were previously feasible at the lowest capital rate are now out of reach. Businesses give up machinery, factories and other equipment, reducing their capital stock. This in turn reduces productivity, output and overtime wages.
The good news is that the opposite is also true. That’s what Republicans did in 2017, when they cut the federal corporate tax rate from 35% to 21%, while broadening the tax base. Chris Edwards of the Cato Institute recently noted that the move boosted investment and wages as hoped, and also succeeded in boosting federal corporate tax collections from $297 billion in 2017 to an expected $569 billion in 2024.
While this spike has been attributed to temporary factors – revenue is expected to decline to $494 billion in 2025 – it has also reduced tax avoidance by companies that have repatriated much of the revenue they had kept overseas. Instead of avoiding higher tax rates, they invested more in America and raised wages in the process.
Furthermore, for all the fairness concerns expressed by the administration to justify the tax increase, the corporate tax is quite unfair. Profits are already subject to tax at the individual level when distributed as dividends or realized as capital gains. Raising the corporate tax rate will exacerbate the double taxation problem, distorting investment decisions and reducing economic efficiency, not to mention encouraging aggressive planning for greater tax avoidance.
Finally, the administration’s plan ignores one of its usual priorities: the fact that many American companies must compete on the international stage. Raising corporate income tax at home makes them less competitive abroad. According to Adam Michel of the Cato Institute, if Biden succeeds in raising the corporate income tax to 28%, the United States would have the second-highest rate among the market-oriented democracies that make up the Organization for Economic Co-operation and Development . America would immediately become less attractive to multinationals and mobile capital.
In an era where economic literacy should guide decision-making, returning to such tax increases is a step backwards – a misstep we can hardly afford in the delicate context of post-pandemic recovery and an increasingly global economy. competitive.
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