Despite the pro-distributors theory that taxes do not disturb the
economy, to the contrary, the effects are real and the increased taxes are not without their negative effects
on the middle class.
Pounding on the issue of Fairness, and that a higher moral ground is
declared, should be a warning more for mischievous politics and bad outcomes.
The time to assume that one can just construct a
get-even policy like the Buffet Rule without it having quite
negative impact on the well-being of the middle class.
President Obama’s budget speech on Monday expanded on the theme of
economic “fairness,” like his State of the Union speech in January. He
lectured Americans that if critical steps are not taken, the rise of the
middle class will be threatened and disparities between the rich and the
rest will continue to grow.
A general theme was that taxing the rich
would get us a long way towards reducing income inequality. This may be
why President Obama failed to extend the promise he made last year to
fight for corporate tax reform. Why lower tax rates on “rich”
corporations if inequality is what really matters?
But when it comes to the corporate tax rate, all is not as it seems.
In a recent paper that I co-authored with Kevin Hassett, we explored
the effect of high corporate taxes on worker wages.
The motivation for
the paper came from the international tax literature (summarized by
Roger Gordon and Jim Hines in a 2002 paper1) that suggested that mobile
capital flows from high tax to low tax jurisdictions. In other words,
in any set of competing countries, investment flows are determined by
relative rates of taxation.
The current U.S. headline rate of corporate
tax is 35 percent. The combined federal and state statutory rate of 39
percent is second only to Japan in the OECD. With Japan set to lower
its statutory rate later this year, the U.S. rate will soon be the
highest in the OECD and one of the highest in the world. What effect do
these high rates have on worker wages?
High Tax rates hurt income and jobs in the
The Obama administration has often disputed the effect of the high
corporate tax rate by suggesting that while the statutory rate is high,
the effective taxes paid by corporations are minimal. Hence, the high
corporate tax rates are not a real issue. In another article that I
wrote last year, I pointed out the flaws in this argument. Even if we
look at effective tax rates (both average and marginal) facing U.S.
corporations, these are among the highest in the OECD. It is no wonder
that firms try to avoid these rates by locating investments overseas or
minimizing capital expansions in the United States.
The low tax revenue
that the United States generates from the corporate income tax is a
reflection of the behavioral response of rational firms to high rates.
The combined federal and state statutory rate of 39 percent is second
(Note: now actually ahead of ) Japan in the OECD.