Michael Meeropol: A Corporate Income Tax Increase Is A Very Good Idea
I assume everyone reading this already knows the basis of the Republican opposition to the Infrastructure Bill proposed by President Biden. One after the other, Republicans are falling all over themselves asserting that it goes “way beyond infrastructure.” For example, let’s take South Dakota Governor, Kristi Noem who said, "I was shocked by how much doesn't go into infrastructure. [I]t goes into research and development, it goes into housing and pipes and different initiatives, green energy, and it's not really an honest conversation that we're having about what this proposal is." [quoted in Ayelet Sheffey, “Kristi Noem's Statement on Pipes not Being Infrastructure Sums up Her Party's Confused Reaction to Biden's Plan,” Business Insider, April 2, 2021]. Or take Senator Mitch McConnell who defined infrastructure as roads, bridges and broadband and promised to resist a “Democratic wish list” as well as a tax increase.
Let’s dispense with Governor Noem’s ignorance. Housing is not part of the nation’s infrastructure? The pipes that deliver water throughout cities are not part of the nation’s infrastructure? Research on how to create a smart grid to deliver electricity to the nation’s homes, businesses, schools and government offices has nothing to do with the nation’s infrastructure? Let’s get real. Infrastructure is defined in the Merriam Webster online dictionary as: “1: the system of public works of a country, state, or region also : the resources (such as personnel, buildings, or equipment) required for an activity
2: the underlying foundation or basic framework (as of a system or organization)” (available at https://www.merriam-webster.com/dictionary/infrastructure). I would argue that beyond the physical things like buildings, water pipes, the electric grid, this definition encompasses an educated public. So, we understand that Republicans want an extremely narrow definition of infrastructure so they can have a reason to oppose the Biden proposal.
Next, we have the traditional Republican objection to raising taxes --- especially taxes on high income people and/or corporations because they are the “job creators.” Ex-President Trump has weighed in, claiming that proposed corporate income tax increase would be the “biggest tax increase in history.” (By the way, if the entire $2.2 trillion dollar proposal were to have NO tax increase associated with it, then the Republicans would get all worried about the rise in the National Debt caused by $2.2 trillion dollar’s-worth of deficit spending )
So the Republicans oppose the proposal because it has a lot of things they don’t believe should be called “infrastructure.” They also oppose it because it costs “too much.” And (finally in addition), they don’t want to raise taxes to pay for any of it.
The journalist Rachel Maddow has a euphemism for the typical barnyard epithet that describes these phony arguments --- Bull Pucky. Fortunately, the public isn’t buying any of it. There is widespread support for the proposal, including the tax increase --- even among Republicans. [See Claire Williams, “Raising Taxes on Wealthy Americans and Corporations to Fund Biden’s Infrastructure Plan Is OK With Over 1 in 2 Voters.” The Morning Consult, March 31, 2021.]
So let’s talk about that proposed tax increase. The proposal is to raise the rate of taxation on corporate income from the 21 per cent to which it had been cut by the 2017 Trump tax giveaway. The proposed new rate would be 28 percent which is below the 35 percent that existed before 2017.
But let’s start with an important first question: why is there a separate corporation income tax at all? Why not rely on the individual income tax? After all, corporations are all owned by individuals. If income earned by a corporation is taxed separately and then the income of the individual owners of a corporation are also taxed, isn’t that DOUBLE TAXATION for the same income?
Well, yes and no. All corporate income that is distributed as dividends does get taxed twice. However, if there were no separate corporate income tax, then wealthy individuals could accumulate vast amount of riches tax free by investing in corporations that distribute little or none of their profits as dividends. As corporations plow back their profits and grow, the VALUE of the corporation’s stock increases. Rich families accumulate wealth as their stock portfolios increase in value.
Without a separate corporate income tax, these rich folks would accumulate wealth completely tax free. AND --- to add insult to this injury --- when a rich person dies, all the stock and real estate (and jewelry and expensive paintings, etc.) is REVALUED and all the increased wealth accumulated over that lifetime passes to their heirs without EVER having to pay a penny in taxes on the increased value of their assets. These heirs can sell as much of these assets as they want the day after they inherit them and declare ZERO capital gains on their income tax form. (Yes, if the value of the estate exceeds a certain amount the heirs have to pay an estate tax. In 2020 only estates greater than $11.58 million pay ANY estate tax. So the heirs of rich people whose capital assets have appreciated to $11.57 million or less can sell any or even all of those assets (once they receive them) and pay NOTHING in taxes – neither capital gains taxes nor estate taxes.)
So the corporation income tax protects the individual income tax from becoming “voluntary” for the rich. Obviously, all owners of stock, whether they receive dividends or not, pay the corporate income tax because the value of their stock ends up being lower than if there were a zero corporate income tax. Since stock ownership is heavily concentrated in the higher income population, it stands to reason that the burden of the corporation income tax is mostly felt by these same high-income people. “In calculating distributional effects, the Urban-Brookings Tax Policy Center (TPC) assumes investment returns (dividends, interest, capital gains, etc.) bear 80 percent of the burden, with wages and other labor income carrying the remaining 20 percent. These assumptions reflect the full, long-term economic consequences of investors responding to changes in the corporate income tax, such as rate changes.” (Tax Policy Center “Briefing Book: A citizen’s guide to the fascinating (though often complex) elements of the US tax system. Who bears the burden of the Corporate Income Tax?”)
The reason the Tax Policy Center believes that some of the burden of the corporate income tax is shifted away from owners of capital to wage earners is because in the long run, the reduced rate of return in the corporate sector causes some change in behavior by investors which (again this is the “long run” – which economists define as a period long enough for all behavioral changes induced by, say, a change in tax rates – such as moving investments out of the domestic corporate sector to overseas investments or into the non-incorporated business sector—to occur) will reduce productivity growth and therefore wage growth. However, the Tax Policy Center notes that in the short run, when investors do not have time to figure out where to move their investments in response to a tax change, 100% of the burden of the corporation income tax falls on shareholders.
So the Biden Administration folks are right --- raising the corporation income tax is part of a long overdue process of getting the rich and super rich to pay “their fair share” --- and of course it’s only a small step in that direction. The reason it’s a small step is because the individual income tax is the major revenue source for the federal government and it holds the most promise for increasing taxation on high income people.
Ever since the late 1970s, the tax system has reduced its progressivity. (“Progressivity in taxation has nothing to do with left wing politics – it means that as your income goes up, the RATE at which you are taxed goes up.). The rate of taxation on higher income people has been reduced from a top rate of 70% in 1980 to the current top rate of 37% beginning in the era of Ronald Reagan. [For a dissection of what I called the “Reagan revolution” see my SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION which is currently available for free on line!]. The Reagan tax cuts were only partially reversed by the 1993 Clinton tax increases. (Under Clinton, the top rate ended up being 39.6%) The Bush II tax cuts revived Reagan era tax cutting and the Obama Administration only reversed some of them. (He did get the rates back up to the level from the Clinton Administration.) The Trump tax cuts of 2017 have been particularly generous to high income people. In addition to cutting the top tax rate to 37 percent and the corporate rate to 21 percent, it also slipped in a big deduction for all non-corporate businesses. As I made clear in a commentary posted on December 1, 2017, this creates tremendous incentives for high income individuals to DEFINE themselves as independent businesses and get a 21 percent reduction in taxable income.
This is all by way of stating what the majority of the population understand and feel intuitively even without getting into the specific weeds of tax policy --- THE RICH MAKE OUT LIKE BANDITS IN OUR TAX SYSTEM. And if we as a nation are going to get serious about not only meeting our needs for government spending on infrastructure, education, the environment, health care, etc. but about making our society less unequal, raising the tax burden on high income people is definitely on the agenda. The corporate tax increase to 28 percent as proposed by President Biden is most appropriate.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies
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