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By Brad Polumbo
President Biden is pushing a $1.9 trillion COVID-19 spending package which he claims will boost the economy. But a new study warns that one other key policy Biden has proposed would hurt the economy and have at least three major consequences for workers.
The president wants to raise the corporate tax rate from 21 percent to 28 percent. He argues that this is about making Big Business “pay its fair share” and raising revenue the government can use to help people.
Yet a recently-released report from the right-leaning Tax Foundation concludes that this would make the US corporate tax rate, federal and state combined, a whopping 32 percent, the highest among developed countries. The experts warn that this policy change would “harm U.S. economic competitiveness and increase the cost of investment in America.” As a result, the researchers found that Biden’s proposed corporate tax hike would shrink the overall size of the economy, reduce wages, and eliminate 159,000 jobs.
“President Biden’s proposed hike would reduce American economic output during a time when we need to maximize economic growth to reach our country’s pre-pandemic growth trend and return to full employment,” the report concludes.
The Context: Corporate Taxes Are Notoriously Harmful for the Economy
As the Tax Foundation notes, economists widely consider corporate taxes one of the most economically harmful forms of taxation, because they decrease business investment and the costs are largely passed on to workers and consumers.
“The elementary fact is that ‘business’ does not and cannot pay taxes,” Nobel Prize-winning free-market economist Milton Friedman once explained. “Only people can pay them. Corporate officials may sign the check, but the money that they forward to Internal Revenue comes from the corporation’s employees, customers or stockholders.”
Many studies from top-tier institutions like the Congressional Budget Office and the American Enterprise Institute have directly documented how the majority (50-70 percent) of the costs accrued from corporate hikes are borne by workers through reduced pay. (Indeed, it’s surely no coincidence that after former President Trump and congressional Republicans cut corporate taxes in 2017, wages rose significantly in 2018).
So, the new study offers even more empirical confirmation of what economics already teaches about the failures of taxing “Big Business”—it inevitably backfires to the detriment of working Americans and consumers.
The Takeaway: Don’t Confuse a Law’s Stated Targets With its Actual Victims
None of the above findings are surprising to the astute economist. Why? Because an important principle of sound economics is understanding the difference between where costs are nominally imposed and where they are actually felt. It’s a sub-example of what economist Henry Hazlitt defined as the key principle in his book Economics in One Lesson: the importance of considering not just direct and short-term policy consequences, but indirect and long-term ones too.
Hazlitt decries “the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups.” He dubs this “the fallacy of overlooking secondary consequences.”
“In this lies almost the whole difference between good economics and bad,” Hazlitt writes. “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.”
In our example, the direct consequence of corporate tax hikes is that corporations are presented with a higher tax bill the next year. The secondary consequence is that the difference is subtracted from worker pay over time.
Understanding and foreseeing these kinds of failures is crucial to sound policymaking—but when it comes to increasing corporate taxes, Biden and his fellow Democrats fail to do so.
If they proceed anyway, well, economics clearly teaches us that it won’t be “Big Business” that’s forced to “pay its fair share”—in reality, workers will pay the price.
Foundation for Economic Education (FEE)