April 2, 2012

Corporate Taxes Trickle Down

Antony Davies

Senior Affiliated Scholar
Summary

Yesterday the United States achieved the distinction of having the highest corporate tax rate of any country in the world. Given the shaky state of our economy, it’s not a distinction worth celebrating.

This article was originally published in The Boston Herald

Yesterday the United States achieved the distinction of having the highest corporate tax rate of any country in the world. Given the shaky state of our economy, it’s not a distinction worth celebrating.

We got here because politicians have exploited voters’ false belief that corporations pay taxes. Yes, corporations hand over tax money to Uncle Sam, but the money ultimately comes out of your pocket. There are only three ways a corporation can come up with the money it needs to pay a corporate tax: It can raise the price of its product; it can pay its workers less; or it can pay the tax out of its profits.

In the first case, you and I pay the tax; in the second case, the corporations’ workers pay the tax. In the last case, the stockholders pay the tax — and before you start equating “stockholders” with corporate fat cats, remember that over half of Americans own stock.

In each example, ordinary people like you and me shoulder the burden.

And this isn’t just a harmless transfer of money from one group to another. When corporations pass the tax on to consumers in the form of higher prices, consumers buy less of the stuff the corporations make and so the corporations cut back on hiring. Jobs disappear. When corporations pass the tax on to workers in the form of lower wages, people earn less money. When people earn less money, they cut back on their spending, which means that they buy less stuff from corporations and, again, corporations cut back on hiring. Jobs disappear.

When corporations pass the tax on to stockholders in the form of lower dividends and capital gains, people see their retirement portfolios stagnate and so they cut back on their spending in an attempt to bolster their retirement savings. More importantly, budding young entrepreneurs lose some of the incentive to take on the risk and headache of starting new businesses and nurturing new ideas. Again, jobs disappear.

To be fair, that’s not the end of the story. Jobs appear when the government spends the tax money it has collected. But, the jobs that appear are jobs that produce things the government wants, while the jobs that disappeared produced things that the rest of us wanted. Dialing up corporate tax rates shifts the economy away from producing things that you want toward producing things that politicians say you should have.

Don’t take my word for it; look at the data. Since 1959, the effective corporate tax rate — that’s the actual amount of taxes corporations pay divided by their incomes — has fluctuated from a low of 20 percent to a high of 45 percent. When the effective corporate tax rate was above 30 percent, the federal government’s tax revenue equaled about an 18 percent slice of the economy. When the tax rate was below 30 percent, the federal government’s tax revenue equaled about an 18 percent slice of the economy. It didn’t matter whether corporate taxes were high or low — the government took the same 18 percent slice of the economic pie.

It turns out that the economic pie is smaller when corporate taxes are higher. In years in which the effective corporate tax rate was above 30 percent, federal tax revenues were about $5,000 per person (adjusted for inflation). But when the effective corporate tax rate was below 30 percent, federal tax revenues were almost $7,000 per person (adjusted for inflation).

This makes for a compelling story that politicians don’t want you to hear: Raising corporate taxes is all about taking economic power away from you and handing it to politicians, and when that happens corporations stop thinking of ways to please us and start thinking of ways to please politicians.

Keep that in mind as we pass this unfortunate milestone.