TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 29, 2013

Bartlett: A New View of the Corporate Income Tax

New York Times:  A New View of the Corporate Income Tax, by Bruce Bartlett:

Calculating the distribution of the federal income tax is relatively straightforward, with the raw data coming directly from federal tax returns. But calculating the distribution of the corporate income tax is much more difficult. That is because corporations are artificial entities and all taxes must ultimately be paid by people. The question is who?

For many years, economists assumed that the corporate tax is paid almost entirely by shareholders. This is unquestionably true when a corporate income tax is first introduced. But over time, corporations adjust their affairs so as to minimize the tax, causing the burden to be shifted. For example, companies may try to raise prices to compensate for the corporate income tax, thus shifting some of the burden onto consumers.

Most economists don’t believe that much, if any, of the corporate tax is shifted onto consumers this way. ... While economists still believe that the bulk of corporate income taxes is paid by the owners of capital, in recent years they have come to believe that workers ultimately pay much of the tax in the form of lower wages. This results from lower capital investment due to a higher cost of capital, which reduces productivity and hence wages, and because capital investment moves to other countries where corporate income taxes are lower.

Economists have known about these effects for a long time; the trick has been estimating the effect precisely enough to incorporate the burden of the corporate tax into distribution tables. The Joint Committee on Taxation now believes that it understands the incidence of the corporate income tax well enough to do so and issued a study explaining its new methodology on Oct. 16.

ChartThe table shows the impact on the distribution of aggregate taxes, including the payroll and other taxes, by including the corporate tax, which was previously excluded from the calculation. The new methodology increases the overall tax burden by $216 billion, the revenue raised by the corporate income tax — an increase of 10.4 percent overall.

This is an important development, because cutting the corporate income tax is a bipartisan goal for tax reform. According to the Organization for Economic Cooperation and Development, the United States has the highest statutory corporate tax rate among advanced economies. This is widely believed to reduce investment in the United States, costing jobs and income for Americans.

Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared, especially by those with incomes below $30,000. Conversely, it means that the Obama administration’s plan to raise new revenue by closing corporate tax loopholes will have a harder time gaining traction, because much of the burden will fall on those with low incomes.

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