Two nights ago at the National Conservatism Conference, Senator Josh Hawley (R., Mo.) told the audience that Trump’s 2017 cut of the corporate income-tax rate to 21 percent is at the top of the list of economic policy mistakes. I am not sure how the people there responded to the claim, but American Compass’s Oren Cass applauded it.
The economics of these two isn’t too good, but their populist signaling is strong. See, they want more taxes on corporations, proving that they are concerned about fairness (labor shouldn’t be taxed more than capital, the senator says) and they are simply following the will of the people.
It still amazes me that “Republicans for Taxes” is the messaging that is supposed to save the Republicans from themselves and bring about a new pro-workers agenda. The thing is that it’s faux populism. Raising the rate of taxation on corporate incomes isn’t just one of the most distortive tax policy you could implement, it is also bad for consumers and workers.
One of the most misunderstood aspects of tax policy is that there is a difference between the person or entity who writes a check to the IRS and the incidence of the tax (i.e., who shoulders the burden of the tax).
As it happens, we know a lot about who shoulders the corporate income tax (in large part thanks to the work of Capital Matters’s Kevin Hassett on the issue). And contrary to what many believe, the economic weight of the higher tax will be shifted to others, such as workers through lower wages, consumers through higher prices, or shareholders through lower returns on investment.
It’s worth expanding on the fact that much of a corporate tax increase will be shouldered specifically by workers. Aparna Mathur recently reviewed the literature and wrote this about her study with Hassett:
In 2006, Kevin Hassett and I co-authored the very first empirical research paper (first reviewed in The Economist in 2006, published in 2015) that studied the incidence of the corporate income tax on workers. We looked specifically at workers in manufacturing, and compiled cross-country evidence on worker wages and headline, effective average and marginal tax rates for 65 counties. Our study showed that high corporate tax rates were negatively associated with worker wages. A series of other papers that subsequently studied the topic found similarly significant, and large, impacts.
She lists many more studies.
A recent Tax Foundation article explained that:
a study of corporate taxes in Germany found that workers bear about half of the tax burden in the form of lower wages, with low-skilled, young, and female employees disproportionately harmed.
A 2020 NBER study finds that:
We can calculate that the incidence on consumers, workers and shareholders is 52%, 28%, and 20%, respectively. Alternatively, using . . . additional controls . . . the tax incidence on consumers, workers and firm owners are 43%, 36%, and 21%, respectively.
(Thanks for the reminder, Jack Salmon.)
Phil Gramm and Mike Solon did a review of the literature and found that:
Most economic studies conclude that 50% to 70% of a corporate tax increase not passed on in higher prices is borne by workers, while 30% to 50% is borne by investors.
I am sure they don’t care that capital taxes are borne to a level by investors, but investors are necessary to fund manufacturing plants, which Cass claims he wants to boost.
Gramm and Solon add:
If you consume, you pay the corporate tax. If you consume and work for a corporation, you pay the corporate tax twice. If you consume, work and invest your retirement funds in corporate equities, the corporate tax rate hits you three times.
That’s why most economists understand that corporate tax is one of the most distortive ways to raise revenue.
So Cass and Hawley’s strain of populism means increasing prices and lowering wages for Americans. That goes hand in hand with their support for tariffs, which of course, raise the prices of the goods and services they are applied to.
Here is a better way to signal that one is populist and isn’t pro-business: Just call for ending all corporate subsidies, tax credits, and government favoritism. That should do it.