Before the tax reform debate that led to the 2017 Tax Cuts and Jobs Act (TCJA), there was some consensus that American corporate tax rates were too high relative to the rest of the developed world. The U.S. corporate tax rate at the time was 35 percent, one of the highest of all OECD countries. Most studies had made clear that these high rates were affecting our nation’s economic competitiveness and holding back both wages and the availability of jobs for American workers. Even leading Democratic economists were supportive of lowering the corporate tax rate.
However, progressive policy groups suggested “big, bad” large corporations were not paying their “fair share,” pointing out the high average wealth of some shareholders and the effective level of taxes that some corporations were paying. This narrative was simply off the mark, as corporate profits are eventually assigned somewhere where they can be taxed, and policymakers rightly made the corporate tax reductions in TCJA permanent.
Since then, the political left has only increased its attacks on corporations, seemingly failing to notice that much of the developed world has moved corporate tax rates to a similar range to ours.
Combined Corporate Income Tax Rates of OECD Countries between 2000 and 2021
This international trend should have helped calm the tax rate debate, as nobody wants Congress to create a competitive disadvantage for American companies by making it more expensive to operate here. But it has not.
Therefore, it seems prudent to revisit some of the core research that helped inform Congress as it put together TCJA, as well as some work published afterward that helped reinforce the clear benefits of lower tax rates for both American workers and consumers. Both the Joint Committee on Taxation and the Congressional Budget Office use a base assumption in their analysis that 25 percent of the burden of any corporate tax increase is absorbed by workers, partially in the form of reduced pay. Recent research shows that labor may bear 70 percent or more of the corporate tax burden. Other research has shown the worker share of the corporate tax burden at approximately 30 to 35 percent. Another well regarded paper found that the wages of workers declined by 49 cents for every dollar increase in corporate income taxes. And another that studied corporate taxes in 13 OECD countries found that 60 percent of the burden—both direct and indirect—is borne by workers. The tax incidence research results reported above are quite varied because each study is using different datasets and assumptions, but the overall conclusion is quite clear—workers bear a significant portion of the burden of corporate income taxes.
Drilling into which workers bear the brunt of the higher burden of increased corporate taxation, one encounters some surprises. A large study conducted in 2017 showed that, while a little more than half of the corporate tax burden fell on workers overall, a higher burden is placed on low-skilled, younger, and female workers. The share of the burden is high enough, according to these researchers, that if the incidence was fully accounted for in the tax system, progressivity would drop by 25 to 40 percent. Tax burdens would be twice as large for workers subject to bargaining agreements, but small and medium sized firms would end up placing the largest burden of corporate tax increases on their workers.
While there is still a lot of debate on what share of the burden of any corporate tax increase is borne by workers, there is general consensus now that a large incidence is indeed shared by them. There is some debate as to the reasons for this burden, but some research points to lower levels of capital investment and entrepreneurship as a result of tax increases.
It’s important to note that it is not just workers who help pay the bill for corporate tax increases. Numerous studies have shown that consumers pay a big portion as well. A paper from NBER noted that around 30 percent of a corporate tax incidence falls on consumers (along with 38 percent on workers), and that this incidence is twice as high for lower priced items, particularly for products that low-income consumers rely on. This evidence further weakens claims of the progressive nature of corporate income taxes.
While there is a need for more research to better understand who ends up paying for corporate income taxes, the often-repeated mantra that the rich and powerful pay these bills is misleading. If that was the case, why did so many European countries lower their rates years before we did?
Policymakers should proceed carefully here. Increasing rates may have unintended consequences that hurt their constituents. The companies that progressives intend to go after—the biggest multinational corporations—will likely find ways to shift and evade these increases, while smaller domestic companies get stuck with a bill that will require them to reduce investment, cut jobs, or increase prices.