By Richard Rubin
WASHINGTON -- President Biden is seeking about $2 trillion in
higher taxes on companies over 15 years to pay for his
infrastructure plan. But corporations are just entities composed of
people, so if corporate taxes go up, who ultimately pays?
The Biden administration says the greater tax burden would fall
largely on high-income shareholders of profitable companies that
wouldn't reduce investments even if taxes rose. That view makes the
corporate tax a useful tool for redistributing income and taxing
people the U.S. individual-income tax can't always reach.
The reasoning is that a company would react to a decline in
after-tax profit by reducing payouts to shareholders in the form of
stock buybacks and dividends. The company's share price could also
be lower than it otherwise would be, hurting shareholders.
"In the short run, it's just shareholders, shareholders,
shareholders," said Steve Rosenthal of the nonpartisan Tax Policy
Center, who described Republicans' 2017 corporate tax cuts as an
enormous giveaway to foreign investors. "The corporate tax is like
the best way to collect revenue from foreigners and rich guys," he
A completely different perspective animated that law.
Republicans, who controlled Congress and the White House, said
workers would gain as corporate taxes declined. The idea was that
those cuts would spur investment and make employees more productive
and able to claim higher wages. In that view, Mr. Biden's
infrastructure spending to help workers would be funded by workers
Republicans point to wage increases and low unemployment through
2019 as evidence that Trump administration policies were working
before the pandemic stopped any momentum. But it is unlikely that
corporate investment flowed into wages so quickly, said Alan Viard,
an economist at the conservative-leaning American Enterprise
Instead, Mr. Viard said, wages could have risen because the same
law's tax cuts for households across all income groups gave workers
more money to spend and helped lift the broader economy in the
"It's kind of surprising and certainly disappointing to see the
apparent results of the Tax Cuts and Jobs Act, of the corporate
rate cut," he said of the 2017 law. "Maybe these effects are not as
strong as we thought."
The Biden administration contends that the wave of stock
buybacks and dividends after the 2017 tax law bolsters the case
that the corporate tax falls largely on shareholders and companies
making particularly high profit margins. The Democratic White House
plays down the potential long-run effects on wages and growth in
calling to increase the corporate tax rate to 28% from 21% -- after
Republicans lowered it from 35% -- and to raise taxes on U.S.
companies' foreign earnings.
Economists have long puzzled over the question of who pays the
"This is one of the great mysteries in public finance, and so
empirical estimates are people feeling around to try to figure it
out," said Mihir Desai, a finance professor at Harvard Business
One obvious thought is that companies raise prices after tax
increases, putting the burden on consumers. Most economists say
there is little effect. They say companies compete for customers
against entities with different tax rules, such as unincorporated
businesses, limiting price changes in response to corporate
Most analysts divide the corporate tax burden between capital
and labor, with shareholders paying short-run costs through fewer
buybacks, smaller dividends and lower share prices. Workers would
get a long-run hit as companies invest less in equipment, limiting
productivity gains and workers' ability to demand wage
Official estimates from the nonpartisan congressional Joint
Committee on Taxation lean toward the Democratic view, assigning
75% of the long-run burden to owners of capital and 25% to
"There's nothing in the debate that suggests there's a big
investment response" to the 2017 corporate tax cuts, said Dhammika
Dharmapala, an economist who teaches at the University of Chicago's
law school. "There may have been wage gains over that period, but
connecting it to the corporate tax cut isn't very straightforward,
to say the least."
The Tax Policy Center, a group run by Mark Mazur until he
rejoined the Treasury Department this year as a deputy assistant
secretary, assigns 80% of the burden to capital. That means 35% of
corporate taxes fall on the top 1% of households, which earn about
16% of total pretax income.
The Tax Foundation, which favors lower rates and fewer tax
breaks, says the split is 50-50. Harvard's Mr. Desai said he thinks
the split is about even. Career Treasury Department economists
estimated in 2012 that capital bore about 82% of the burden, with
labor shouldering the rest.
The Treasury under the Trump administration removed that
analysis from its website, and Secretary Steven Mnuchin said much
of the burden fell on workers. The Biden administration reposted
If most of the burden falls on capital, it is important to
understand who owns corporations and whether they can be taxed
directly in ways that have a smaller economic impact.
Some shareholders are taxable American investors, particularly
high-income ones. Beyond corporate taxes, they face sharply higher
taxes from Mr. Biden's proposal to raise top tax rates on capital
gains and dividends to 43.4% from 23.8%. Some owners are
tax-preferred investments such as 401(k) plans, which are more
evenly distributed among income groups than stock ownership as a
For others -- namely foreigners and tax-exempt funds such as
university endowments and foundations -- the corporate tax is the
U.S. government's only meaningful way of extracting significant
revenue from these wealthy institutions while preserving their
nonprofit status that would be politically hard to alter. In
effect, the U.S. can tax Harvard University or another country's
sovereign-wealth fund by taxing companies they own.
Foreigners own about 42% of U.S. equities, according to the Tax
Policy Center, with 23% held by U.S. taxable investors and much of
the rest in retirement accounts.
Mr. Desai said lawmakers concerned about income distribution
should focus more on assisting poorer households and less on
raising corporate taxes that could slow investment.
"The puzzle to me about the entire debate is just how quickly
the corporate tax got mired in this issue of fairness when we know
the [effect] is so unclear," he said.
Even models that show most of the corporate tax burden falling
on capital affect middle-income households with retirement funds.
They also show a modest longer-term effect on workers.
The bottom 80% of households pay more than one-quarter of
corporate taxes, according to the Tax Policy Center. The Biden
administration, which says it won't raise taxes on households
making under $400,000, doesn't consider those effects as breaking
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
May 04, 2021 08:26 ET (12:26 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.