Corp tax cuts and the middle class: they’re not that into each other

August 10th, 2017 at 10:42 am

Over at WaPo, but here are some extra goodies for the privileged OTE’ers (that’s you!).

First, going right down into the weeds, the piece notes that the CBO assumes that the incidence off the corporate tax falls 75% on capital income and the rest on labor income. That’s about standard now, as Huang and DeBot show here, though you can find estimates that assign a much larger share to labor (which would make cutting the tax less regressive than my piece suggests, and I firmly believe, it is).

However, CBO used to assign 100% of the tax to capital, and the figure below shows how that changes the shares of who pays the corporate tax (the CBO reports the impact of the change for 2009). Intuitively, if the tax falls more heavily, in this case, exclusively, on capital income, since such income is more concentrated at the top of the income scale, the 100% assumption makes the tax more progressive, and the proposed cut from 35 to 15% more regressive.

Source: CBO

But isn’t 100% an extreme assumption? Surely some of the burden of the tax falls on labor, through the mechanisms discussed in my WaPo piece.

Probably, but there’s one good reason why it is likely that the incidence increasingly falls on capital: the increased concentration of corporate sales and thus excessive profits.

I discuss and show this concentration here, but it is well known and widely agreed to be a problem. If not outright monopolies, the increase of monopolistic competition has the potential to distort prices, innovation, and productivity.

Here’s how CBO explains this (my bold):

“Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns. Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns.

If you’re earning some degree of monopoly profits–I’m talkin’ to you Google, Amazon, Microsoft, etc.–much more of the incidence of the corp tax falls on your profits than on your workers’ paychecks. So, if anything, the usual 75/25 capital/labor split is likely “conservative.”

Second, on the paucity of evidence re the trickle-down chain from corporate tax cuts to investment, productivity, and GDP growth, I cited some of my earlier work on this re taxes on capital gains, which show bupkis in this space, but I also link to this more detailed analysis from Tom Hungerford: “Lowering the corporate income-tax rate would not spur economic growth. The analysis finds no evidence that high corporate tax rates have a negative impact on economic growth (i.e., it finds no evidence that changes in either the statutory corporate tax rate or the effective marginal tax rate on capital income are correlated with economic growth).”

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15 comments in reply to "Corp tax cuts and the middle class: they’re not that into each other"

  1. D. C. Sessions says:

    The 25% might not be all that unrealistic if you consider how much executive compensation is pegged to profits.

    • Jared Bernstein says:

      Good point, though some of this is maybe cap gains that shows up in comp (eg, exercised stock options showing up on W-2s). But you’re making an important point I left out: to the extent that some share of the corp tax cut reaches workers, much of that will accrue to high-end/exec pay.

  2. Kaleberg says:

    How does this work? Wages and benefits paid to workers are tax deductions for corporations. You would even think that higher corporate tax rates would encourage higher pay and more benefits by corporations as a means of “cheating” the tax man. If you raised pay, your company might even move into a lower bracket.

  3. Smith says:

    Don’t look for patents to blame. Google provides search for free, advertiser supported like broadcast TV, Amazon boasts lower prices, undercuts bricks and mortar stores even with shipping costs, only partly offset by state sales tax cheaters, the online Walmart, and Microsoft hangs on in spite of competing free offerings of their main products, Linux for an OS, dominant in servers, and OpenOffice, which barely dents Microsoft Office sales. Amazon especially has nothing special technology wise. Apple came out of nowhere to dominate phone sales despite Nokia’s dominance and Nokia patents. Facebook offers nothing technologically advanced, but the network effect creates a natural monopoly, which however didn’t save MySpace, or AOL. It is a myth that tech succeeds based on rents from patents. Google gives android operating system away for free to compete with Apple, Oracle gives away MySql and supports Java, the open source free software. The major software servers? from Apache to Node, open source and free. IBM? The rely mostly on consulting services.

    Monopolies are a problem. Lack of competition, not enforcing anti-trust law, and not regulating natural monopolies. Patents? Not so much. We’ve always had patents. It’s concentration of business that waxes and wanes.

  4. dwb says:

    First, I’d agree that oligopoly or monopoly profits (Apple, Google, Microsoft, etc.) are a problem. But keeping tax rates high disadvantages those companies in competitive markets. i.e. indiscriminately punishes everyone. Especially those that do not have access to a Irish corporate center that allows them to launder profits to reduce taxes. If you could figure out a way to tax true monopolies without disadvantaging other companies, that might be as real plan. In any case this is a second best solution to actually breaking them up and lowing tax rates.

    Second, the sticker marginal rate of 35% is not the real tax rate. Apple only pays about 18%. Facebook, 18 based on the latest results. Alphabet (Google) 19%. Perhaps theoretically the incidence is 100%, but the model does not include clever corporate tax attorneys. Please do not tell me about “closing loopholes” – there is no tax law a free thinking Goldman Sachs Investment banker cannot outmanevuer, probably with an Irish corporate office.

    lowering corporate tax rates… meh. But recognizing reality (18%), simplifying the code, and putting Wall St and DC tax attorneys out of business has some efficiency appeal. Moving to a territorial system so that all these tax reduction schemes going through Ireland are eliminated … even better. Apple has a quarter trillion in cash overseas hoping for repatriation amnesty. Which is even more evidence that incidence of corporate taxation on capital is very low when capital is extraordinarily mobile and clever, as it is today. I often think companies like GE are tax strategy departments bolted into manufacturing firms. But the manufacturing part is an aside. Facebook took on a major initiative last year… to lower taxes (not improve the experience). They saved billions.

    I hear what you are saying about monopoly profits. In an ideal world, sure. But the reality is that the current tax code encourages a lot of unproductive activity, and companies do not really pay the 35% any more than consumers pay the sticker price for cars.

    • Smith says:

      You are being terribly naive to think you can’t close tax loopholes. Maybe politicians, economists, corporations, and tax attorneys would like you to believe that. It is not rocket science.

      Tax rates are not too high. You are being duped into believing that due to corporate, conservative, and rich people’s propaganda. The actual rate being paid, you cite 18%, is only one of many reasons that corporate rates should not be considered too high. I would posit that they are in fact too low. Allowing corporations to accumulate profits as large as they do, in our modern economy, grants them too much power.

      Germany and France, the largest and most prosperous countries in continental Europe, 30 to 33%

      Uk, is only 20% but they have much higher income tax rates, 40 percent at £45,000 No wonder the working class revolts and votes Brexit.

      The broaden the base, lower the rates, is classic bate and switch that Obama and Clinton supported too. They were too stupid to see the idiocy of the deal because their advisors and experts told them this enlightened policy.

      In short, there is no valid liberal argument for lowering corporate rates. Corporations already have record profits. Corporations are mostly owned by rich people, and already have record amounts of cash. Giving them more won’t help workers. It will just add to inequality.

      To anyone, including Obama and Clinton, advocating lowering the corporate rates I would ask “Are you stupid? Or just evil?”

      • dwb says:

        I am not being “duped,” and dumb unpersuasive arguments like that are what will ensure a Republican majority for years to come.

        • Smith says:

          My arguments are very specific giving valid reasons citing data and facts. If you have some great secret that no one knows about, readers might like to know.
          Your argument makes zero sense, that you can have a lower rate without loopholes, but you can’t have a higher rate without loopholes. Why would lowering from 18 to 30 suddenly put tax lawyers out of business? One could make the case that the 12% difference makes tax avoidance expense too high, lower by third only saves 6% instead of 10%. Is there any data to support that? Do any companies that pay more than 18% ever just give up looking for more tax breaks?

          Companies pay less tax not because of loopholes, but because politicians let them. Corporate lobbyists dangle donations to elected government office holders. Now miraculously and magically, lowering the rates will end new efforts to lower taxes.

          If you can close loopholes at 18%, you can close them at 30%. That’s my argument.

          • Smith says:

            Also, rates should be higher due to record corporate profits. Corporations are just sitting on the cash, not investing. The cash is used for stock buy backs to raise the wealth and income of executives, board members and rich people. It’s used to buy competitors and reduce competition while consolidation also reduces employment. Foreign cash is merely used as collateral, so there is practically no penalty for keeping cash overseas.
            Instead of lowering rates, we should raise rates, but politically it’s easier under the guise of an excess profits tax.
            A new tax law that forces companies to pay tax on foreign profits new and already earned should be passed.

            Your arguments are Republican arguments, you, Obama, and Clinton, are all too willing to listen to centrist Republican lite Democrats. That’s what ensures a Republican majority.

      • Anglo-Saxon says:

        The working class revolts? lol, you need to study that “brexit” vote more. You did not get it.

  5. JF says:

    How to say this? Please consider that profit taxes and high payroll taxes lay on small businesses, you know, domestic companies where most of us live.

    This entire discussion is focused on huge multinational companies. A bias in the public policy framing, one that smacks of elitism all around.

    I await reform discussions that apply tax base definitions and rate schedules that are different for small and medium sized entities compared to these cash-rich highly profitable multinationals who clearly, by the evidence, do not need even more favorable economic policies.

    So to be plain. Keep high profit tax rates on the multinationals, and even higher rates for financial sector firms for moral hazard reasons alone but also to reflect their endogenous money privileges and narrowness (croney ‘capitalism’ is not a bad metaphor though, justifying monopsony and monopoly views of base and rates in this special sector).

    But how to help steer much more income flow to basic wages? I would look at lowering payroll tax rates as it seems to me that this does lay upon wages much more than profit taxation rates. Of course, that shows my agenda, which is seeking public policy that respects and honors work and purposely adjusts for labor market distortions so that income shares are actually shared (perhaps by using the 1960s as a benchmark), in all fairness.