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Corp tax cuts and the middle class: they’re not that into each other

Summary:
Over at WaPo, but here are some extra goodies for the privileged OTE’ers (that’s you!). First, going right down into the weeds, the piece notes that the CBO assumes that the incidence off the corporate tax falls 75% on capital income and the rest on labor income. That’s about standard now, as Huang and DeBot show here, though you can find estimates that assign a much larger share to labor (which would make cutting the tax less regressive than my piece suggests, and I firmly believe, it is). However, CBO used to assign 100% of the tax to capital, and the figure below shows how that changes the shares of who pays the corporate tax (the CBO reports the impact of the change for 2009). Intuitively, if the tax falls more heavily, in this case, exclusively, on capital income, since such income is

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Over at WaPo, but here are some extra goodies for the privileged OTE’ers (that’s you!).

First, going right down into the weeds, the piece notes that the CBO assumes that the incidence off the corporate tax falls 75% on capital income and the rest on labor income. That’s about standard now, as Huang and DeBot show here, though you can find estimates that assign a much larger share to labor (which would make cutting the tax less regressive than my piece suggests, and I firmly believe, it is).

However, CBO used to assign 100% of the tax to capital, and the figure below shows how that changes the shares of who pays the corporate tax (the CBO reports the impact of the change for 2009). Intuitively, if the tax falls more heavily, in this case, exclusively, on capital income, since such income is more concentrated at the top of the income scale, the 100% assumption makes the tax more progressive, and the proposed cut from 35 to 15% more regressive.

Corp tax cuts and the middle class: they’re not that into each other

Source: CBO

But isn’t 100% an extreme assumption? Surely some of the burden of the tax fall on labor, through the mechanisms discussed in my WaPo piece.

Probably, but there’s one good reason why it is likely that the incidence increasingly falls on capital: the increased concentration of corporate sales and thus excessive profits.

I discuss and show this concentration here, but it is well known and widely agreed to be a problem. If not outright monopolies, the increase of monopolistic competition has the potential to distort prices, innovation, and productivity.

Here’s how CBO explains this (my bold):

“Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns. Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns.

If you’re earning some degree of monopoly profits–I’m talkin’ to you Google, Amazon, Microsoft, etc.–much more of the incidence of the corp tax falls on your profits than on your workers’ paychecks. So, if anything, the usual 75/25 capital/labor split is likely “conservative.”

Second, on the paucity of evidence re the trickle-down chain from corporate tax cuts to investment, productivity, and GDP growth, I cited some of my earlier work on this re taxes on capital gains, which show bupkis in this space, but I also link to this more detailed analysis from Tom Hungerford: “Lowering the corporate income-tax rate would not spur economic growth. The analysis finds no evidence that high corporate tax rates have a negative impact on economic growth (i.e., it finds no evidence that changes in either the statutory corporate tax rate or the effective marginal tax rate on capital income are correlated with economic growth).”

Jared Bernstein
Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute, and between 1995 and 1996, he held the post of Deputy Chief Economist at the U.S. Department of Labor.

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