What a corporate tax hike could mean for Americans
Lawmakers are gearing up for a battle over raising taxes as the Biden administration and Democrats move forward with efforts to invest in infrastructure. As part of his $2 trillion American Jobs Plan, President Joe Biden is proposing an increase of the corporate tax rate to 28% from its current 21%.
But Republicans are already raising alarms. Senate Minority Leader McConnell suggested it's a "Trojan horse" for a massive tax increase. Republican staff on the Senate Finance Committee said Wednesday the proposed tax increases on American businesses would put U.S. companies at a disadvantage globally and translate to fewer jobs, lower wages and lower retirement account values for workers.
According to tax experts, the more immediate impact of raising the corporate tax will fall squarely on shareholders— many of whom are wealthy and in some cases even foreign. The Tax Policy Center estimates 80% of the tax burden with corporate rate changes falls on shareholders or business capital while labor is hit with roughly 20% of the burden. In the short run, the left-leaning think tank estimates the entire burden falls on shareholders.
"We could create a story that parties other than shareholders will bear the burden, but it's a long-run story," said Steve Rosenthal a senior fellow with the Tax Policy Center. He said the potential impact on workers could be as many as 10 to 20 years in the future.
Meanwhile, the center-right Tax Foundation estimates after-tax incomes would fall by 1.8%, but also puts that in the long run.
The Biden proposal to raise the corporate tax rate back up comes just over three years after President Trump's tax law slashed the corporate tax rate from 35% to 21%. The Trump administration claimed at the time the legislation would result in increased wages, but in the short time since, it has yet to come to fruition. And then the pandemic struck.
"We were promised it would trickle down, but we never saw that," said Rosenthal.
The Biden administration is claiming it would use the money from partially reversing Trump's corporate tax cut to invest in job creation. Administration officials said the increase coupled with several other corporate tax changes will raise more than $2 trillion over the next 15 years, more than paying for the American Jobs Act investments and millions of jobs.
The White House has also been adamant individuals and households making less than $400,000 will not pay more in taxes. But some Republicans have already suggested there could be an indirect increase through other living costs with questions about the burden on Americans and what they pay.
At a recent hearing, Treasury Secretary Janet Yellen suggested evidence of the effect an increase in the corporate tax would have on prices and on consumers is very unclear from existing studies, and some economists agreed.
But while studies have predominantly examined the impact of corporate tax changes on shareholders and worker wages, one recent study on the impact increasing the corporate taxes could increase what people pay for goods.
The National Bureau of Economic Research paper found taxes imposed on producers do impact final retail sales prices and estimated that increasing the corporate tax rate one percentage point leads to a 0.17% increase in retail product prices. The research suggests other models policymakers use significantly underestimate the impact of corporate taxes on consumers.
"Was the campaign, now the administration referring to the direct sort of tax bill which is mostly being hit on folks above $400,000, or are we also including the indirect effects of the tax in the form of reduced growth, in the former of lower worker wages, in the form of higher prices?" asked Garrett Watson of the Tax Foundation. "If you take them literally, it sounds like they meant the former, but the latter really should matter just as much as any other tax change because it is going to affect folks' incomes."