Taxing Corporations Hurts Workers

COMMENTARY Taxes

Taxing Corporations Hurts Workers

Dec 13th, 2019 2 min read
COMMENTARY BY
Adam Michel

Senior Policy Analyst, Grover M. Hermann Center

Adam N. Michel focuses on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center.
When the economy is humming, as it is today, it’s lower-income and middle-class Americans who benefit the most from rising wages, low unemployment and plentiful job opportunities.  Kanchisa Thitisukthanapong/Getty Images

Key Takeaways

Economic research overwhelmingly shows that a majority of the corporate tax payments come at the expense of workers’ wages.

When the corporate tax goes down, wages go up.

Hitting businesses with new or higher taxes could bring the march of rising wages to a dead stop and slam the door on job openings.

Every year it seems Americans call out a new corporate boogieman—some company that supposedly didn’t pay enough tax. A few years ago, General Electric made headlines. Amazon regularly gets admonished, and most recently, FedEx was publicly shamed in the New York Times. Often these exposés lead to claims that all businesses should pay higher taxes.

Focusing on the taxes paid by any one firm is often misleading, and calls to raise taxes on all businesses will primarily hurt their employees. Economic research overwhelmingly shows that a majority of the corporate tax payments come at the expense of workers’ wages. Historically, for every $100 the government extracts from business income, wages will decline by more than $75 in subsequent years. The rest of the tax cost is passed on to consumers through higher prices and owners/shareholders through smaller profits. But it’s workers who pick up most of the tab.

This isn’t some secret known only to economists. Almost 80% of Americans understand that high corporate taxes lower wages and encourage corporations to do business outside of the U.S.

So when politicians call for corporations to pay more in taxes, it’s worth asking: At what cost?  

When the corporate tax goes down, wages go up. We’ve seen that happen following the 2017 tax reform that lowered the corporate tax to 21%, among many other important changes. 

When the economy is humming, as it is today, it’s lower-income and middle-class Americans who benefit the most from rising wages, low unemployment and plentiful job opportunities. 

Average wage growth over the last year was 3.1%, according to the most recent data from the Bureau of Labor Statistics. And lower-wage workers have seen wage increases of 7% or more—a $1,500 raise for someone making less than $25,000. Before last year, wage growth hadn't reached 3% since 2009. 

Keeping business taxes low and well-designed is crucial. Otherwise, firms are discouraged from hiring new workers, improving compensation or making new investments. A properly designed tax levies profits rather than revenues. That means that when firms are losing money or expanding rapidly, they might not pay tax that year. 

Taxing profits means that the system rightly allows firms to deduct costs—wages, investments, rent, etc.—from their revenues. 

When a firm expands by hiring new employees, buying new delivery trucks or building warehouse capacity, they might pay no income tax because their costs exceed their revenues in that year. The tax system also allows businesses that see future opportunities to reinvest what would be taxable profits back into their operations and workers. 

Until the 2017 tax reform, the tax code prohibited businesses from deducting the full cost of a new piece of equipment. Instead, they could write off only a fraction of the cost, spread out over a period time of set by the IRS. The 2017 tax cuts allowed more investments to be fully “expensed,” giving businesses the ability to immediately write off the full cost. 

Historically, this type of reform leads businesses to increase new investments, as the after-tax cost of buying that next truck or computer is lower. The increased investment will decrease taxable profits in the immediate term. As a result, business taxes can be lumpy—uneven year to year. If businesses are expanding, they might not pay taxes currently; only when profits are made and not reinvested back into employees and infrastructure should taxes be paid.  

If we instead taxed businesses at higher rates or did not allow them to fully deduct their expenses, they would have less incentive—and less of the necessary wherewithal—to add jobs, raise wages and invest in growth.  

We don’t have to like that businesses pass their costs on to employees and consumers, but policymakers do need to acknowledge that taxes of all types have real costs that must be paid by real people. 

Hitting businesses with new or higher taxes could bring the march of rising wages to a dead stop and slam the door on job openings. When businesses are forced to send more money to the IRS, they spend less on hiring and expanding.

This piece originally appeared in The Detroit News