Corporate Taxes Don’t Just Soak the Rich

By Robert VerBruggen

Wednesday, March 31, 2021

 

Biden’s new infrastructure proposal is out. It would dump a lot of federal money into infrastructure and a long list of unrelated priorities, and pay for it by hiking taxes on corporations.

 

A couple weeks ago I explained why massive federal infrastructure funding should not be a priority right now. Here I’d like to spell out why the corporate-tax hikes in this proposal — which take several forms, including pushing the tax on corporate income from 21 to 28 percent — violate Biden’s pledge not to hike taxes on “anyone” earning less than $400,000.

 

In a certain literal sense, these taxes are paid by the corporations themselves. But of course, any tax paid by a business ultimately gets passed through to a flesh-and-blood human being, whether it’s a shareholder, a worker, or a customer. There’s a big debate over how much of the corporate income tax is borne by labor vs. capital, but the labor share is certainly not zero (and not all stockholders are wealthy anyhow). Therefore, hiking corporate taxes hits lower-income Americans to some extent.

 

The left-leaning Tax Policy Center puts the labor share at just 20 percent. As the center’s Howard Gleckman explained last year,

 

when TPC modeled Biden’s tax proposals in March (before he added about 20 new ideas) it found that low- and moderate-income households would on average see some decline in their after-tax incomes — not from individual taxes but from their share of corporate tax increases.

 

TPC estimated that in 2021 three-quarters of all Biden’s tax increases would be borne by the highest-income one percent of households (those making $837,000 or more). But after-tax incomes of low-income households would fall by about $30 on average, about 0.2 percent. Middle-income households would see an average decline of about $260, or 0.4 percent.

 

The next “quintile” above what Gleckman calls “middle-income” (those between the 60th and 80th percentiles of the income distribution) would see a tax hike of $590, or 0.5 percent of after-tax income. Basic division suggests these folks are taking home about $118,000 to begin with — well below the $400,000 threshold, which captures only about the top 2 percent of taxpayers.

 

Others argue that the capital share is well above 20 percent, which would mean much more damage to the middle and working classes. A 2017 Tax Foundation report said it’s probably 70 percent or higher, and could be as high as 100 percent.