Who Pays, Who Benefits?
In the intricate dance of taxation, the spotlight often falls on who bears the tax burden and who reaps the rewards of corporate tax cuts. A recent analysis by Berkeley economist Gabriel Zucman has ignited discussions by suggesting that billionaires now have a lower effective tax rate than working-class Americans. This claim, stemming from Zucman’s research with Emmanuel Saez, posits that the owners of capital exclusively benefit from corporate tax reductions.
The debate is not black and white, as economists grapple with the distribution of corporate tax impacts. While businesses forward taxes to the IRS, it’s a mix of workers and capital owners who truly shoulder the cost. The 2017 Tax Cuts and Jobs Act (TCJA) has been a focal point, with Zucman attributing the drop in taxes paid by the wealthiest Americans from 2017 to 2018 to shareholders benefiting from slashed corporate taxes.
However, an alternative perspective suggests that workers’ wages may also rise as a result of lower corporate taxes. This is due to increased investment in capital equipment, which can enhance productivity and, consequently, wages. The potential for boosted foreign investment further complicates the picture, potentially leading to wage increases.
Alternative Views
Kevin Hassett, formerly of the American Enterprise Institute and later an adviser in the Trump White House, argued that workers could receive over 200 percent of the benefits from corporate tax cuts. His projections for wage increases under the TCJA were optimistic but have been met with skepticism as wage growth has not kept pace with expectations.
The consensus among analysts tends to align more closely with Zucman than Hassett, acknowledging that while some burden does fall on workers, a significant portion is borne by capital owners. The Tax Policy Center (TPC) assumes that 60 percent of the corporate tax burden falls on shareholders, with the remainder split between all capital owners and labor.
Who Pays, And When?
A further layer of complexity is added when considering which workers bear the brunt of corporate taxes. Research indicates that higher-paid employees may carry a larger share of this burden, thus standing to gain more from tax cuts. Over time, the effects of corporate tax changes can shift; initially favoring shareholders but eventually benefiting workers through productivity gains.
Conversely, higher corporate taxes might prompt firms to relocate profits or change business structures, potentially reducing the impact on shareholders but only over an extended period. Understanding this transition timeline remains a challenge for economists.
Perspective Matters
The discussion extends to which shareholders are affected by tax changes. TPC research shows that a relatively small proportion of corporate stock is held by taxable entities. As Congress contemplates the future of the TCJA, the ongoing debate over tax incidence will play a crucial role. Ultimately, opinions on potential corporate tax increases may hinge on perceptions of who will end up paying those taxes in the end.
