Corporate Tax Cuts and Their Impact on Inequality
Corporate tax cuts and corporate tax avoidance exacerbate income inequality. When corporations pay less in taxes, the primary beneficiaries are the owners of corporate stocks, who are predominantly among the wealthiest households. According to recent data, 29 percent of these benefits flow to the richest 1 percent of U.S. households, and another 29 percent to the next richest 4 percent. In total, 84 percent of the benefits from corporate tax breaks go to the richest 20 percent of households.
Furthermore, when accounting for foreign investors, who own 40 percent of shares in U.S. corporations, the distribution becomes even more skewed. Foreign investors receive 40 percent of the benefits, while the richest 1 percent and the next richest 4 percent of U.S. households receive 17 percent and 18 percent, respectively. Thus, 90 percent of the benefits from corporate tax breaks go to foreign investors and the wealthiest 20 percent of U.S. households.
Racial Inequity in Corporate Tax Benefits
Corporate tax cuts also worsen racial inequity within the tax code. White households, who own a disproportionate share of corporate stocks, receive 88 percent of the benefits that remain in the U.S., despite making up only 67 percent of U.S. households. In contrast, Black and Hispanic households each receive just 1 percent of the benefits, although they constitute 12 percent and 9 percent of households, respectively.
Even white Americans lose out when considering how corporate tax cuts benefit foreign investors. With over 40 percent of American corporate stock owned by foreign investors, a significant portion of the benefits from lower corporate taxes flows out of the U.S., reducing the overall benefits for Americans.
Long-Term Effects on Labor
Even if we assume that some benefits from corporate tax breaks eventually flow to labor, the conclusions remain unchanged. Congress’ official revenue estimators assume that in the long run, a fourth of the benefits will flow to workers as increased compensation. However, even with this assumption, 83 percent of the benefits from corporate tax breaks would still go to foreign investors and the richest 20 percent of households.
Americans have consistently expressed that corporations should pay more in taxes. This sentiment is supported by data showing that corporate income tax plays a crucial role in enhancing class mobility and racial justice. Reforms limiting corporate tax breaks and avoidance could raise revenue to finance public investments benefiting everyone and reducing economic and racial inequality.
Limiting corporate tax breaks would help all Americans by keeping resources within the U.S. rather than funneling them to foreign investors who own a significant portion of shares in U.S. corporations. Ultimately, all taxes are paid by people, directly or indirectly. Reduced corporate taxes mean higher after-tax profits for companies, benefiting shareholders through dividends or stock buybacks, which transfer wealth to shareholders.
The corporate income tax affects “C corporations,” while “pass-through” businesses are taxed through personal income tax returns of their owners. Some economists argue that lower corporate taxes could benefit workers by increasing investment in American companies, enhancing productivity, and potentially raising wages. However, historical data shows that after-tax profits do not necessarily correlate with investments that enhance productivity or lead to higher wages.
In conclusion, corporate tax cuts disproportionately benefit wealthy and white households while contributing to racial inequality by rewarding ownership of corporate stock—an asset significantly contributing to the racial wealth gap.
