EC Hiking Corporate Taxes Won’t Improve Economic Outcomes

The Biden Administration is discussing hiking corporate taxes to pay for the proposed infrastructure spending package. While the goal is to ensure the “rich pay their fair share,” a look at history suggests changing tax rates will have very little impact on economic outcomes.

Leading up to, and following, the passage of the Tax Cuts and Jobs Act (Trump Tax Cuts) I wrote a lot of analysis on:

  1. The fallacy of tax cuts,
  2. Why tax cuts wouldn’t change corporate behavior; and,
  3. How tax cuts are an ineffective method of improving economic prosperity.

What we know now, is that our analysis was correct. As noted, corporate behavior didn’t change, and instead of jumpstarting economic growth, tax cuts led to a wider dispersion of wealth inequality.

As I stated then:

“While the mainstream media hope is all this cash will be flowing back into the economy, the reality is that it will primarily go to stock buybacks. Again, while not necessarily bad, it is the ‘least best’ use of the company’s cash. Instead of expanding production, increasing sales, acquiring competitors, or making capital investments, the money gets used for a one-time boost to earnings on a per-share basis.”

corporate taxes, Hiking Corporate Taxes Won’t Improve Economic Outcomes

While wages did rise marginally, due more to tightness in the labor market rather than tax cuts, corporations failed to share the wealth. In fact, the ratio of profits to worker’s wages has materially worsened since the enactment of tax cuts.

corporate taxes, Hiking Corporate Taxes Won’t Improve Economic Outcomes

In other words, the “devil is in the details,” as “corporate cronyism” devoured Washington politics.

“The greatest trick the Devil ever pulled was convincing the world he didn’t exist.”– The Usual Suspects (1995)

So, if “tax cuts” didn’t work, how about Biden’s plan to “increase” taxes?

 

Over Estimation Meets Over Spending

Given the national debt is rapidly approaching $30 Trillion, with deficits expanding rapidly, even some of the Democratic party is starting to become uncomfortable. As such, in order to get another massive spending bill passed, it will require increased taxes to “pay for it.”

While Biden’s plan includes increased estate and personal taxes, we are going to focus on corporate taxes for the purposes of this article. As shown, Biden hopes to raise $1.4 Trillion in revenue from corporations, along with roughly $2 trillion in payroll and individual income tax increases.

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Alex Johnson 3 weeks ago Contributor's comment

Hiking taxes will only prolong the suffering.

At this difficult time, businesses need some breathing space and tax hikes will only choke them.

Anne Davis 4 weeks ago Member's comment

Good read.