The Joint Committee on Taxation (JCT) has joined the Congressional Budget Office (CBO) and Treasury in assuming some of the corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden falls on labor:
The debate over the incidence of corporate income taxes is ongoing, with a range of estimates on the precise breakdown depending on the assumptions of underlying models. Nevertheless, the existing research has arrived on two clear points of consensus. One is that the burden of the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. falls largely on domestic individuals, and therefore the corporate income tax does impact the well-being of these individuals. The second is that the burden of corporate income taxes is not borne entirely by capital owners, and is instead shared between capital owners and labor with the share borne by each being the subject of ongoing debate.
In estimating the long-run burden of corporate income taxes on capital and labor, the Joint Committee staff follows the middle range of the current economic literature by assuming that 25 percent of corporate income taxes are borne by domestic labor and 75 percent are borne by owners of domestic capital.
While this is progress, it does not in fact reflect the middle range of the current economic literature. At least since the 1990s, most economists have recognized that the burden of corporate taxes fall mainly on labor in the long run. There are a plethora of reasons for this.
First, capital and labor are the main inputs to production, and they are complementary, meaning taxing capital ultimately hurts workers. Think of how unproductive you’d be without computers, and how much less you’d get paid. Now think of where computers come from: companies that pay corporate tax. Raising the corporate tax on them reduces the number of computers produced. The chart below, from an economics textbook, shows what happens to workers' wages when there is less capital per worker.
Second, on average workers get about two-thirds of GDP growth in the form of wages, and capital gets about one-third. Taxing capital does not change that ratio, it just reduces GDP growth, thus reducing wage growth.
Third, capital is the most sensitive input to taxes. Capital is more mobile than labor, meaning capital can relatively easily move across borders to avoid taxes. Investors are also more sensitive to after-tax returns, so when faced with higher taxes on capital income they simply invest less and consume more. Most workers do not have the luxury of working considerably less when their after-tax wages go down.
Fourth, consistent with these results, most empirical studies find corporate taxes, and other taxes on capital, are the most harmful to economic growth. And since slower economic growth translates into slower wage growth, studies find that corporate taxes reduce wages.
Oddly, JCT’s analysis assumes no effect of taxes on economic growth, so it’s unclear how they could distribute any of the tax burden to labor. Instead, the 25/75 figure seems to come from CBO.
JCT assumes an even smaller share of the pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. tax burden falls on labor (5 percent), since pass-through businesses are less able to shift capital across borders. Again, that ignores the reality that business owners of all types can simply choose to reduce investment and hiring in the face of taxes, or even close down and lay everyone off.
JCT, CBO and Treasury should acknowledge the reality that most people work for businesses, and most of the business tax burden falls on workers.
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