The Cut Inflation Act making its way through the Senate would bring in about $740 billion over ten years and direct it towards energy security and efficiency, expanding health care and deficit reduction. Its biggest revenue-raising provision is a much-needed reform that requires the roughly 150 corporations with more than $1 billion in profits to pay at least 15% of their total profits in taxes.
Opponents of requiring corporations to pay even a minimum of taxes have an unpopular position. But over the weekend, Senator Mike Crapo, the top Republican on the Senate Finance Committee and leader of that opposition, used a one-sided and incomplete approach. analysis claim that the corporate minimum tax would raise taxes for low- and middle-income people.
This analysis comes from the official Congressional revenue estimators at the Joint Committee on Taxation (JCT). It examines some (but not all) of the revenue provisions and none of the expenditure provisions.
The JCT’s analysis finds that in 2023, the provisions it is examining would raise taxes overall by about $54 billion. Because it shows these amounts split among people in different income groups, readers can easily get the impression that people will literally pay higher federal taxes on April 15, but that’s not the case. For example, the analysis reveals that in 2023, those with incomes over $500,000 will pay 43% of the $54 billion tax increase and those with incomes over $200,000 will pay 69 % of the tax increase. Crapo’s Press release focuses on the remaining 31% of the tax increase and calls it a middle-class tax increase.
In reflecting on the argument made by Senator Crapo, the most important points for legislators to remember are:
1. Crapo’s argument rests on an analysis that ignores many of the bill’s tax reductions and cost savings for individuals.
2. Despite the exclusion of these very concrete tax reductions and cost savings for individuals, the analysis includes the “indirect” tax increases resulting from the minimum corporate tax, which are more speculative and do not are not tax increases as normal people would define them.
3. For good reason, the American public does not intuitively believe the kind of argument Crapo relies on to label corporate tax hikes as tax hikes for low- and middle-income earners.
Senator Crapo relies on analysis that ignores many of the bill’s tax cuts and cost savings for low- and middle-income earners
Chye-Ching Huang of NYU’s Tax Law Center explained over the weekend that the JCT’s analysis omitted several key provisions, including those that would lower taxes for low- and middle-income people. One is the bill’s extension of expanded health care premium tax credits which were enacted under the American Rescue Plan Act. Also left out are tax credits to reduce the cost of energy-efficient cars and homes.
Also excluded is the bill’s provision to control prescription drug prices, which is effectively structured as a new excise tax on drug companies that don’t comply with the new pricing scheme.
These provisions would reduce taxes and costs for individuals and households, but the JCT analysis that Crapo relies on does not take them into account.
The analysis on which Senator Crapo relies includes speculative “indirect” tax increases that most people would not consider tax increases
To make their point, Senator Crapo and other opponents of raising corporate taxes point to “indirect” tax increases that would fall on people at different income levels according to JCT. Indirect tax increases are not tax increases as most people understand them. Excise tax increases are a loss of something – anything – resulting from a change in tax policy.
JCT assumes that someone has to pay corporate income tax indirectly. Corporations pay these taxes directly, but common sense tells us that the burden of all taxes should fall, at least indirectly, on real people. No one can say for sure who pays exactly how much corporate tax indirectly, so JCT uses certain conventions and assumptions to answer this question. ITEP follows these conventions in order to produce comparable estimates, but we recognize that they are only one of many plausible approaches.
According to the conventions of the JCT, increases in corporate tax lead to increases in indirect taxes on individuals in at least two ways.
First, individuals who own shares of corporations or invest in mutual funds holding shares of corporations face increased indirect tax when corporate tax increases. This would happen because higher corporate taxes would leave companies with somewhat lower profits to pay out in the form of dividends and less valuable stocks, reducing the capital gains investors receive when they sell stocks. This loss of dividends or capital gains is certainly a loss of something valuable to investors, but it’s not literally a “tax increase” as most people think of the term. Since the value of corporate shares also affects the value of other company assets, economists describe this as an increase in the indirect tax on capital in general. Most of this burden falls on the wealthiest taxpayers, who own most of the shares and other assets of the company, but of course some people in lower income groups could, in theory, feel some indirect effects of the increase in corporate tax.
Second, and more controversially, JCT assumes that part of the corporate tax increase is ultimately paid for by labor rather than capital – meaning that part of the increase in l Indirect tax takes the form of lower wages for workers. In the first year that a corporate tax hike is in effect, JCT assumes that the indirect tax increase falls entirely on capital (on owners of shares and other assets of the company). ‘company). But after that, JCT assumes that part of the increase in indirect taxes falls on labor each year until, a decade after the tax hike takes effect, 25% of the increase in indirect taxes fall on labor, which means that 25% of the effects take the form of lower wages for workers.
But that’s an economic theory, and it may not happen in real life. Wages may have little or no relationship to corporate taxes. Indeed, the 2017 tax law reduced corporate taxes, and businesses have largely responded by share buybacks which enriched the shareholders. And higher productivity may increase shareholder profits but not worker wages, especially with the decline of unions that might bargain to capture some of those profits for labor.
Like the indirect capital tax increase, the indirect labor tax increase is not a literal “tax increase” as most people understand the term, but rather a theory about how tax changes might affect people, and a very speculative theory.
Americans don’t believe corporate tax hikes are tax hikes for low- and middle-income people
A poll last year showed that the corporate tax increases in Biden’s original economic proposal (which were even bigger than those in the IRA) were popular. A poll revealed that the single most effective message in favor of the bill described the need to end the special breaks and loopholes that allowed 55 corporations to avoid corporate income tax in 2020, at the height of the pandemic.
Most Americans clearly do not believe that they will be negatively affected by increases in corporate taxes.
The intuition of most Americans that corporate taxes are too low is a correct intuition. IRA opponents like Senator Crapo use convoluted arguments to mask this, but it is unlikely to work.