The gains from cutting corporate tax rates

by on November 18, 2017 at 12:18 am in Data Source, Economics, Law, Uncategorized | Permalink

Here is a recent paper by Stephen Bond and Jing Xing:

We present new empirical evidence that sector-level capital–output ratios are strongly influenced by corporate tax incentives, as summarised by the tax component of a standard user cost of capital measure. We use sectoral panel data for the USA, Japan, Australia and eleven EU countries over the period 1982–2007. Our panel combines internationally consistent data on capital stocks, value-added and relative prices from the EU KLEMS database with corporate tax measures from the Oxford University Centre for Business Taxation. Our results for equipment investment are particularly robust, and strikingly consistent with the basic economic theory of corporate investment.

Via Henry Curr.  Here is a piece by Fuest, Piechl, and Siegloch, forthcoming in the American Economic Review:

This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities. Administrative linked employer-employee data allows estimating heterogeneous worker and firrm effects. We set up a general theoretical framework showing that corporate taxes can have a negative effect on wages in various labor market models. Using an event study design, we test the predictions of the theory. Our results indicate that workers bear about 40% of the total tax burden. Empirically, we confirm the importance of both labor market institutions and profit shifting possibilities for the incidence of corporate taxes on wages.

Via Dina D. Pomeranz.  I’ve been reading in this area on and off since the 1980s, and I really don’t think these are phony results.

1 Moo cow November 18, 2017 at 12:37 am

The statutory rate will be loweted. Will the effective rate be lowered?

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2 Maximilian November 18, 2017 at 1:12 am

I agree and yet: even if you take those as true, it doesn’t support the proposed cut in rates.

While cutting marginal rates will increase investment and, to some extent, wages; there’s no benefit in cutting rates on _existing_ investments.

Separate profits into old vs new investments in difficult, but we could bring the rate down over time, or allow full deductibility of investments.
And if you particularly care about wages, cut the tax on paying workers rather than the tax on paying investors (both groups still benefit).

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3 GoneWithTheWind November 18, 2017 at 9:46 am

Kinda “separate but equal”, right. That should work out well.

0% federal income tax will create an economic boom. Tinkering around the edges will do little to nothing.

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4 Joan November 18, 2017 at 1:12 am

Less than 40% of business income is currently taxed at the corporate rate,the rest is from pass throughs and taxed as individual income. What the rate on “small business ” and LLCs etc will matter as much or more since rules have changed to alow even publicly traded stocks to be pass throughs. When the lowest net tax was capital gains plus the corporate tax there was a tax incentive for firms to retain earning and there was a higher savings and investment that there is now, dispite the lower net taxes now. It looks as if income from pass throughs is more likely to be used for consumption which may account for the increase in consumption from 60 to 68 percent of GDP since 1980.

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5 Harun November 18, 2017 at 2:53 pm

But if you lower corporate rates, then some pass-throughs may switch to C corp. It will be more attractive than it is now.

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6 Joan November 19, 2017 at 12:08 am

I agree, as long as corporate plus capital gains rate is less than the pass through rate. However the proposed plan will also lower pass through tax to 25%. There are graphs at visualizingeconomics.comthat shows the historical data..

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7 BC November 18, 2017 at 2:24 am

Here is a thought experiment to determine whether you believe corporate taxes are incident on workers’ wages. Suppose employees at each firm were allowed to vote on their own firm’s tax rate. If you don’t believe that the corporate tax is incident on your own wages, then you should have no problem voting to increase your own company’s tax rate even if employees at other firms vote to exempt their own firms. After all, if the tax is paid by your firm’s shareholders and not you, then why not allow the government to collect that tax to pay for benefits, some of which will return to you as a citizen? Would you vote to have your employer pay a higher corporate tax then every other firm? I sure wouldn’t.

Here is an unrelated topic, but part of the general topic of tax incidence. Do federal employees pay income tax on their wages? I know they do nominally, but that tax goes back to their employer, the federal government. So, doesn’t that mean that, while their actual salary may be lower than their official nominal salary, they actually don’t pay any tax? (NB: this is quite different from a private sector employee whose after-tax salary is less than the pre-tax salary. In that case, the difference between the two does *not* go to the employer, creating a gap between what the employer pays and what the employee receives.)

For example, suppose a private firm and the federal government both value a worker’s output at $100k/yr and the tax rate is 20%. The private firm offers the worker $100k and the worker receives $80k after paying taxes. The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*. The net result is that the federal government pays $100k and the worker receives $100k after taxes, i.e., the worker earns $100k tax free, $20k more than he or she would earn at the private firm. Another way of seeing this is to note that taxes paid by employees are economically equivalent to taxes paid by employers. So, if employers received rebates for income taxes paid by employees, then the net income tax would be zero. Well, the federal government *does* receive a rebate for all income taxes paid by employees!

Doesn’t this mean that taxes are doubly distortive? Not only do they discourage employment by creating a gap between what (private) employers pay and what workers receive — the usual cited distortion — they also distort the *composition* of the workforce by allowing the federal government to crowd out other employers.

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8 Efm November 21, 2017 at 9:05 pm

Although this might be true from a net accounting perspective, I think the answer is that government agencies don’t see tax revenue as actual agency revenue. It’s just money they get from somewhere. Now if e.g. the DOD set salaries and collected income taxes, this might be an issue, but that’s very far from how things work.

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9 Viking November 18, 2017 at 4:07 am

In one sense, it is worse than your description, because the department manager that determines salaries of government workers typically does not have her interests aligned with the taxpayers’ interests.

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10 Viking November 18, 2017 at 4:08 am

Above was supposed to be a reply to BC.

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11 Jsk November 18, 2017 at 4:12 am

Workers may bear 40% of the corporate burden but surely a higher % of the labor tax burden? The relevant trade-off is corporate vs non corporate tax.

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12 byomtov November 18, 2017 at 9:11 am

Well, yes.

There is that.

Economists love to talk about opportunity cost, some of the time.

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13 mulp November 18, 2017 at 4:33 am

The US has the lowest tax rates on labor costs in capital and production for all goods and services consumed in the US. Mostly zero.

The tax rates on labor costs are 17% in China, 19% in Germany, generally 20% plus in most of the EU, for goods and services consumed in those nations. The outlier is Japan with a rate of 10-12%.

Profits are basically taxed at the same rate as labor costs in all nations where consumed, but a second tax on profits is imposed in the supposed origin country, if there is any profit.

US based corporations have become very good at having zero profit in the US, with effectively zero profit producing in Asia, but very high profits in a few nations that do not tax profits.

But the profits are taxed in China, Germany, EU, by the VAT. But not in the US.

Apple pays more in taxes on its profits on sales in China, Germany, EU, et al than it pays on profits for products produced in China and sold in the US.

The US is an outlier on taxes because businesses pay so little in taxes they must pay more in wages and benefits than EU nations for the same worker because the state provides the benefits that US based businesses must pay. If businesses don’t pay for the benefits, consumer demand for production is reduced by the costs of those benefits. Businesses then demand government pay for more consumer spending with medicaid, snap, EITC, etc.

But when US business sells in the EU, it pays taxes to fund worker benefits in the EU, while EU firms pay nothing toward worker benefits in the US.

This is the root of Ryan, Trump, Cohen, et al frustration on every other nation “cheating and subsidizing exports to the US”.

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14 Benjamin C. November 18, 2017 at 4:49 am

But what if we look at it the other way:

A tripling of the standard deduction will decrease the cost of labor, resulting in larger returns to capital and more capital formation.

I think capital would get about 40% of the standard deception tax cuts returned to them in lower wage costs…..

I am pretty sure I can gin up the data to support this view later, especially since one really ever checks the work…..

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15 clockwork_prior November 18, 2017 at 6:52 am

Hands up how many people believe this. Wait, why aren’t the other hands up?

‘Our results indicate that workers bear about 40% of the total tax burden.’

But don’t customers end up paying 100% of the tax burden? – I seem to recall reading that somewhere.

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16 Andrew November 18, 2017 at 7:00 am

What about the argument that, even if corporate tax cuts do spur investment generally, a corporate tax cut enacted today would mostly pass through to investors due to the current environment of excessive desired savings (relative to investment opportunities) and low unemployment?

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17 DanC November 18, 2017 at 7:43 am

Will blue states, where most S&P 500 companies are headquartered, get a greater benefit from a reduction in corporate taxes than red states?

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18 rayward November 18, 2017 at 7:44 am

Globalization and capital flows have so changed the dynamic that old data, even if not cherry-picked, offer little guidance today; indeed, notice Cowen’s qualified endorsement of the authors’ conclusions: “I really don’t think these are phony results”. Of course not! Corporations are flush with profits and cash but it’s not matched with investment, at least not investment here. In order to induce a significant investment here, the corporate tax rate cut would have to incorporate complementary (i.e., punitive) measures that I don’t believe Cowen would support. Like water seeking its own level, capital seeks the highest rate of return. Here, that means “investment” in assets with rising (or fluctuating) prices, with assurances from the quants and their algorithms. Does Cowen believe the returns from those investments are “phony results”?

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19 Anonymous November 18, 2017 at 7:50 am

Do such papers ever A:B two tax regimes, or is it always “cutting tax A or B makes people feel awesome?”

Seems to me, and I’m not just being negative here, but it seems to me that when you have spending, someone has to pay the tax.

(W1A is back)

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20 byomtov November 18, 2017 at 11:15 am

Correct.

Even if workers get only 1% of the gain, that’s just wonderful, as long as you view the corporate tax cut in complete isolation from the rest of government fiscal activities.

Nice trick.

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21 byomtov November 18, 2017 at 9:14 am

If so much of the corporate tax is paid by workers rather than shareholders why is the stock market – made up of shareholders after all – so happy about a cut?

Panel data schmanel data.

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22 Anonymous November 18, 2017 at 9:18 am

You can kinda make it work, because when you reason from price you can claim anything. Example:

The stock market believes most of the value will go to workers, but is betting on second order effects as workers expand their consumption, in a virtuous cycle.

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23 Bill November 18, 2017 at 10:24 am

So, ah, you talk about the gains from the corporate tax cut and do not offset that with the increase in the federal deficit.

Double entry bookkeeping is something you should learn.

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24 byomtov November 18, 2017 at 10:30 am

Tyler’s efforts to justify this steaming pile of a giveaway to the wealthiest people in the country continue.

Yeah. It’s all for the workers.

If you want to give the middle class a tax cut here’s a simple way to do it: Lower the rates in every bracket except the top one. Period. No complexitites. No “bank shots,” as Brown put it. No deep economic research.

But that’s not what the GOP wants. Remember when they wouldn’t appropriate money to fight the zika virus because they needed offsetting cuts? Now $1.5 trillion is no big deal. Scum.

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25 Anonymous November 18, 2017 at 10:36 am

I guess when they complained that “democracy was really just voting other people’s money into your own pockets,” they were announcing their own intention.

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26 Bill November 18, 2017 at 11:41 am

Hey, listen, that’s what the Donor Class wants.

I like it when people say it is the voter putting other peoples money in their pocket when the voters disapprove of the tax cut. “Most American voters — 52 percent — disapprove of the GOP proposals to overhaul the tax system, according to a Quinnipiac University poll released Wednesday. Only 25 percent of respondents approve of the Republican effort.”

Obviously there is a disconnect between the voter and the Donor Class.

Who do you think is being heard?

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27 Michael Cain November 18, 2017 at 12:36 pm

Who do you think is being heard?

Some Republican in the US House was pretty blunt about it during the last month. I can’t lay my hands on the exact quote, but it was effectively: We have to pass tax reform because the big donors have told us the money spigot will be shut off if we don’t.

I was surprised that he said it right in front of reporters.

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28 byomtov November 18, 2017 at 3:39 pm

I think it was Lindsey Graham. Not sure.

29 Moo cow November 18, 2017 at 12:10 pm

Every accusation is a confession.

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30 DG November 19, 2017 at 1:46 am

@Byomtov – You do realize that everyone pays the same tax on income through the brackets, right? That is, someone that makes $500,000 doesn’t pay 39.5% on all $500k, but just the amount between the entry to that bracket and their last dollar of income.

Therefore, cutting the rate of any bracket is a ‘tax cut for the rich’. Since the ‘rich’ pay the vast majority of (net income taxes), it’s pretty hard to give anyone else much of a break without most of it going to the ‘rich’ (in parentheses since a lot of them, esp in high tax states don’t feel very rich. I’m not one of them, but I feel pretty blessed with where I am).

If you want to give others a break in tax burden at a federal level, it almost has to be in payroll tax I think. The rich will still get a break there too.

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31 Ricardo November 19, 2017 at 6:33 am

“Therefore, cutting the rate of any bracket is a ‘tax cut for the rich’. Since the ‘rich’ pay the vast majority of (net income taxes), it’s pretty hard to give anyone else much of a break without most of it going to the ‘rich’”

First, not quite true. Cutting rates on lower brackets would leave the alternative minimum tax untouched. Second, just target revenue neutrality or revenue enhancement and raise top rates while lowering rates on the bottom brackets.

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32 byomtov November 19, 2017 at 6:24 pm

DG,

No patronizing, please. Yes. I understand that.

Please note that I suggested not cutting the top bracket. Therefore, while it is true that high-income individuals would get a tax break under my proposals, it would not reduce the rate on their income above the $500K.

My point really is that this plan is really all about giving the wealthiest people in the country a huge tax break. The talk about a “middle-class tax cut” is smoke and mirrors and lies. If you want to give the middle class a cut there are easy ways to do it.

For this reason, I am not much interested in the kinds of analysis Tyler offers, at least not with respect to this bill. These things miss the forest. The bill needs to be judged for what it is – a giveaway to Republican donors. It is an act of politics, not of economic policy. That is the most important single thing about it. And it’s scummy. Virtually every argument being made by its proponents is false.

So if someone wants to write yet another paper about tax incidence, fine. But let’s not pretend it has much to do with what’s going on in DC.

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