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Who pays Biden’s corporate tax hike is an important policy debate question

The Biden administration has said it will put a greater tax burden on high-income shareholders of profitable companies that do not reduce their investment even if they raise taxes. That view makes corporate tax a useful tool for redistributing income and taxing people who are not always reachable by US personal income tax.

The reason is that companies will respond to lower after-tax profits by reducing shareholder payments in the form of share buybacks and dividends. The company’s stock price can also be lower than otherwise, hurt shareholders.

“In the short term, it’s only shareholders, shareholders, and shareholders,” said Steve Rosenthal, a tax policy center joint venture between the Urban Institute and the Brookings Institution. He explained that the Republican Party’s 2017 corporate tax cut is a huge giveaway to foreign investors. “Corporate tax is like the best way to raise income from foreigners and the rich,” Rosenthal said.

A completely different perspective brought the law to life. Republicans who ruled Congress and the White House said lower corporate taxes would increase the number of workers. The idea was that these reductions would encourage investment, increase employee productivity and allow higher wages to be charged. In that view, Mr. Biden’s infrastructure spending to support workers would be covered by the workers themselves.

The Biden administration’s infrastructure plan, which aims to repair roads as part of a broad investment, will be covered by a $ 2 trillion corporate tax hike over 15 years.


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Republicans point to rising wages and low unemployment by 2019 as evidence that the Trump administration’s policies were working before the pandemic stopped momentum. But Alan Beard, an economist at the Conservative American Enterprise Institute, said corporate investment is unlikely to flow into wages so quickly.

Instead, Mr Beard may have raised wages as the same legislative tax cuts on households in all income groups gave workers more money to spend and helped lift a wider economy in the short term. I said I couldn’t.

“It’s kind of surprising and certainly disappointing to see the obvious consequences of tax cuts and employment laws, corporate rate cuts,” he said of the 2017 law. “Maybe these effects aren’t as strong as we thought.”

The Byden administration argues that the post-tax law wave of stock repurchases and dividends in 2017 supports the case where corporate taxes are levied primarily on shareholders and companies with particularly high profit margins. The Democratic White House has raised the corporate tax rate from 21% to 28% after the Republican Party has reduced the corporate tax rate from 35%, calling for a tax increase on foreign incomes of U.S. companies, potentially long-term for wages and growth. I’m downplaying the impact.

Most economists say that consumers generally do not suffer higher prices as a result of corporate tax increases.


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David Paule Maurice / Bloomberg News

Economists have long been confused about the question of who pays corporate tax.

Mihil Desai, a professor of finance at Harvard Business School, said:

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Not surprisingly, businesses are raising prices after the tax hike, putting a strain on consumers. Most economists say it has little effect. They state that entities and companies with different tax laws are competing for customers, such as businesses that are not incorporated, limiting price fluctuations in response to corporate tax.

Most analysts divide the corporate tax burden into capital and labor, and shareholders pay short-term costs through less repurchases, less dividends, and lower stock prices. Workers will be hit in the long run as companies reduce their investment in equipment, limit productivity gains, and limit their ability to demand higher wages.

The official estimates of the Independent Parliamentary Taxation Joint Committee are leaning towards the Democratic view, allocating 75% of the long-term burden to capital owners and 25% to workers.

“There is no argument to suggest a significant investment response” to the 2017 corporate tax cut, said economist Damika Dharmapala, who teaches at the University of Chicago law school. “Wages may have risen during that period, but linking them to corporate tax cuts is not that easy, to say the least.”

In his first parliamentary speech, President Biden called for huge federal investments, including $ 2.3 trillion in infrastructure and $ 1.8 trillion in family and education programs. Gerald F. Save reveals four key points from his speech. Photo Illustration: Ksenia Shaikhutdinova

The Tax Policy Center, which Mark Mazur operated as Assistant Secretary until returning to the Treasury this year, has allocated 80% of the burden to capital. In other words, 35% of corporate tax falls into the top 1% of households that earn about 16% of their total pre-tax income.

The Tax Foundation, which favors lower tax rates and lower tax deductions, says the split is 50-50. Harvard University’s Desai said he believes the divisions are nearly even. Economists from the Ministry of Career Finance estimated that in 2012 capital would bear about 82% of the burden and workers would bear the rest.

The Treasury under the Trump administration has removed the analysis from its website, and Secretary Steven Mnuchin said much of the burden was on workers. The Biden administration has reposted the analysis.

If the majority of the burden is on capital, it is important to understand who owns the company and whether it can be taxed directly in a way that has less economic impact.

Some shareholders, especially high-income investors, are taxable American investors. Beyond corporate taxes, they are facing sharply high taxes from Mr. Biden’s proposal to raise the maximum capital gains and dividend rates from 23.8% to 43.4%. Some owners are tax-preferred investments such as 401 (k) plans, which are more evenly distributed among income groups than the entire shareholding.

For others, such as foreigners and tax exemption funds such as university funds and foundations, corporate tax draws significant income from these wealthy institutions while maintaining a non-profit position that is difficult to change politically. It’s the only meaningful way for the US government. In effect, the United States can tax Harvard University or other government-affiliated funds by taxing its own company.

According to the Tax Policy Center, foreigners own about 42% of US stocks, 23% are held by US taxable investors, and much of the rest is held in severance pay accounts.

Desai said lawmakers concerned about income distribution should focus more on helping poor households, rather than raising corporate taxes, which could delay investment.

“The puzzle for me about the whole debate is how quickly corporate taxes fell into this issue of fairness when we knew it. [effect] It’s very unclear, “he said.

Even a model that shows that the majority of corporate tax burden is on capital affects middle-income households with retirement funds. They also have a modest long-term impact on workers.

According to the Tax Policy Center, the bottom 80% of households pay more than a quarter of their corporate tax. The Biden administration has stated that it will not raise taxes on households under $ 400,000 and does not consider these effects to break promises.

Biden’s $ 2.3 trillion infrastructure plan

Write to Richard Rubin (richard.rubin@wsj.com)

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Who pays Biden’s corporate tax hike is an important policy debate question

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