Research finds that corporate tax rate cuts boost income and productivity
Corporate taxes are some of the more popular taxes there are. Last year, Morning Consult found that:
“Sixty-five percent of registered voters said they strongly or somewhat support funding Biden’s infrastructure plan through 15 years of higher taxes on corporations, while 21 percent somewhat or strongly oppose it.”
This popularity probably stems from the belief that these taxes – because they are called ‘corporate’ taxes – are actually paid by corporations, and aren’t they all owned and run by greedy capitalists?
This belief is mistaken. Just because a tax might be levied on corporations, it does not follow that they will bear the burden of it. As I’ve written before:
If demand for the corporation’s product or service is ‘price inelastic’, the stockholder-owners can pass most or all of the burden of the tax onto consumers in the form of higher prices. If labor is plentiful, say in times of high unemployment, workers can be replaced with machines, or the corporation can fairly easily move to another tax jurisdiction, the burden of the tax might be passed on to workers in the form of lower wages. Only where demand for the corporation’s output is price elastic, labor and capital substitutes are scarce, and the corporation cannot move, will the main burden of the corporate tax fall on the stockholder-owners.
There is a decent sized body of empirical literature which attempts to quantify exactly who bears the burden of corporate taxes. These studies suggest that labor bears between 50% and 100% of the burden of the corporate income tax, with 70% or higher the most likely outcome.
There is further bad news for advocates of corporate tax hikes. Not only do they not actually tax the people you want to tax, they make us all worse off. That is the finding of new research by economists James Cloyne, Joseba Martinez, Haroon Mumtaz, and Paolo Surico.
In a new paper, they “study the persistent effects of temporary changes in U.S. federal corporate and personal income tax rates” and find that:
“A corporate income tax cut leads to a sustained increase in GDP and productivity, with peak effects between five and eight years. R&D spending and capital investment display hump-shaped responses while hours worked and employment are much less affected.”
Even so, the charlatans pushing the dishonestly named ‘Inflation Reduction Act’ want to hike corporate taxes.
“…personal income tax cuts trigger a short-lived boost to GDP, productivity and hours worked but have no long-term effects.”
There is something here to annoy everybody. These might not be the findings you would like, but if you like your policy evidence based, these are the findings there are.