A new special report from the Tax Foundation finds that when businesses are targeted with tax hikes, it’s actually the workers who end up being hit hardest. They conclude:
This study examines this correlation between corporate tax rates and wages, and it finds a causal relationship. States with comparatively low corporate taxes have seen wages rise beyond what they would have otherwise. Specifically, a one percent drop in the average tax rate leads to a 0.014 percent rise in real wages five years later. In dollar terms, that means wages rise $2.50 for every onedollar reduction in state-local corporate income taxes.
The reverse is also true: A one percent hike in the average tax rate leads to a 0.014 percent drop in real wages, or roughly a $2.50 loss in wages for each one-dollar rise in corporate tax collections. These results add to a growing literature in the international arena that compares changes in corporate tax rates and workers’ wages. Altogether, this body of work draws into question the conventional wisdom that corporate taxes add to the progressivity of the tax system. If instead of burdening capital, the corporate tax primarily burdens labor, as this study finds, then the corporate income tax does not add to the progressivity of the tax system.
States with high corporate income taxes have depressed their workers’ wages over the long term, while states with low corporate taxes have boosted worker productivity and real wages.
This finding is consistent with other research focusing on the international trend towards lower tax rates: high corporate taxes tend to depress real wages.
According to this study, on average, between 1970 and 2007, a one-dollar increase in the average state-local corporate tax rate caused a $2.50 dip in wages five years later, compared with lower-taxed states.
A growing body of literature is showing that the burden of corporate income taxes falls predominantly on labor.
He doesn’t think so. BusinessWeek recently sat down with President Obama and got his take on his relationship with the business community. Very interesting discussion and I recommend you read it in its entirety:
BusinessWeek: A lot of business leaders consider you to be antibusiness. I was struck when I attended the Aspen Institute Ideas Festival. [Council of Economic Advisers member] Austan Goolsbee was speaking, and he hit a fairly hostile audience. These are wealthy, fairly progressive older people who had tended to support you, but they seemed very upset about corporate taxes, individual taxes, card check, all sorts of things you’re doing that they perceived as not helpful to them. What can you say to those people?
Pres. Obama: Let’s look at the record. I’ve been in office six months. So far my only tax policy has been to cut taxes for 95% of working people. I haven’t signed a bill that’s raised taxes yet. To the extent that we have put in place policies, they’ve all been directed at helping businesses. A number of those who think we’re antibusiness seem to forget that it was just three or four months ago when, at great political expense, we yanked them out of the fire. And they still—at least if they’re in the financial sector—are enjoying a whole bunch of government guarantees that are propping up their business models. So it’s hard for me not to be a little skeptical when I hear that somehow we’ve been antibusiness.
BusinessWeek: But you’re aware of that perception?
Pres. Obama: Well, here’s what I think. To the extent that I can identify any aspects of this that make any sense, one is that, at the height of the AIG (AIG) debacle, I used pretty tough language in terms of folks paying themselves bonuses at a time when they were given big taxpayer bailouts. I continue to believe—and this is not antibusiness, this is common sense—that if you’ve presided over an enormous meltdown that has resulted in about $10 trillion worth of wealth being lost, that you might want to be a little self-reflective and perhaps change your business goal. And when I see Wall Street not doing that, it tells me not only that they have forgotten the recent past, but that they are putting the country’s economy at further risk. One of the things I’m worried about is, having had to step in in extraordinary ways, we now have even more potential for moral hazard, where financial institutions think to themselves, "We can continue to take extraordinary risks and pay ourselves extraordinarily high salaries or bonuses because we know that we are too big to fail." I think that’s dangerous for the economy and for business. And so that would be one example.
What are your thoughts? Are his critics in the business community too hard on him — or not hard enough?
If tax rates can in fact be said to influence where companies locate and invest, the U.S. has a problem. As our economy becomes increasingly global our combined (federal and provincial/state) income tax rate is higher than every other country in the world, except Japan. Both presidential candidates have recognized the need to do something. Sen. John McCain proposes a significant reduction of the current 35% federal rate to 25%. Although coupled with other proposals and not nearly as definite or assertive, Sen. Barack Obama also indicated he is open to lowering the rates.
The U.S. can’t afford to ignore what most other industrialized countries have already figured out: the corporate income tax rates affect investment. This year China dropped its rate from 33% to 25%; and Taiwan, Hong Kong and Korea, which already had much lower rates than the U.S., dropped theirs even more. And it is not just in Asia. The adjustments swept Europe with Germany, Italy, the U.K. and Spain all making rate reductions. It is truly a global thing. Other countries that are part of the wave of cuts: Turkey, Bulgaria, Israel, South Africa and Colombia.
So with so much talk of change in other contexts, it is important to point out that it is also time for a change to our corporate tax rate. A full listing of the corporate rates in nations belonging to the Organization for Economic Cooperation and Development, along with other revealing information on this subject is available from the Tax Foundation.