Corporations Don’t Pay Corporate Taxes. People Do
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A mammoth infrastructure bill is on the way from Congress, and policy-makers are touting a corporate-tax-rate hike to help pay for it. Treasury secretary Janet Yellen even proposed a global minimum corporate-tax rate this week. These are both bad ideas for three reasons.
First, corporations do not pay any corporate tax — individuals do. That is because companies pass on their costs. Some of the tax is paid by consumers, who pay higher prices. Company employees pay some of the tax through lower wages. And investors’ retirement accounts pay some of the tax through lower returns.
So, while it might be good politics to stick it to big corporations — or at least to posture that way in front of voters and television cameras — a corporate tax-rate hike would not accomplish its intended goal. Instead, taxes are paid by individuals who then get less for their money, receive smaller paychecks, and have a harder time saving for retirement.
In a 2020 study by Scott R. Baker of Northwestern University, Stephen Teng Sun of City University of Hong Kong, and Constantine Yannelis of the University of Chicago estimate that 31 percent of the cost of an increase in corporate taxes is borne by consumers, 38 percent by workers, and 31 percent by shareholders, or about a third each. Other studies have found different ratios. A 2020 Tax Policy Center study, a joint effort between the Urban Institute and the Brookings Institution, estimates an 80–20 split between investors and labor. The Tax Foundation’s Stephen J. Entin estimated in 2017 that labor pays 70 percent or more of the corporate tax. Differences aside, these studies share a common conclusion: Ultimately, corporations themselves pay no corporate tax.
A second problem involves Secretary Yellen’s proposed global minimum corporate-tax rate. She floated the proposal this week at an IMF/World Bank spring meeting in Chicago and would like to have an agreement among G20 countries by July.
For decades, the U.S. long had one of the world’s highest corporate-tax rates, at 35 percent. Former President Trump cut the rate to 21 percent, which is close to the global average of 23.85 percent. A global minimum tax would excuse the U.S. from competitive pressure to make further cuts by giving companies fewer tax havens to which they could flee.
A third problem is that a global minimum corporate-tax rate would open up a fresh rent-seeking opportunity for U.S. corporations — rent-seeking being economists’ term for getting special government favors.
It is not difficult to imagine a U.S. company lobbying heavily to raise its rivals’ taxes in lower-tax countries. This would make the U.S. company more competitive, but in strictly relative terms. Such a lobbying win could aid a company without it having to do the hard work of improving its products or offering consumers better deals.
At the same time, though, foreign companies could lobby to raise U.S. corporate-tax rates for similar reasons. Why bother improving your own company when you can just hurt your rivals instead? That is the real race to the bottom.
The federal government has already amassed a debt larger than America’s annual gross domestic product. The new administration has already increased that burden with a $1.9 trillion COVID spending bill and is proposing to add even more debt over the next 15 years with an infrastructure spending bill of at least $2 trillion.
The revenue to pay for these projects should be raised honestly and transparently. Individuals pay all corporate tax, but its cost is hidden: It never shows up as an item on their shopping receipts, paychecks, or investment statements the way sales taxes and other fees do.
That explains the corporate tax’s political appeal. So does its mistaken “sticking it to the big guys” image. But it is a false image. If lawmakers want something funded, they should tax people directly, so we can better see the connection between what we pay to the government and what we get from it in return.
