Corporate Taxes Are Wealth Taxes

Corporate Taxes Are Wealth Taxes

2021-04-08 10:43:11
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The main cause of the radical drop in tax rates for very wealthy Americans over the past 75 years is not the one that many people would guess. It's not about lower income taxes (although they certainly play a role), and it's not about lower estate taxes (although they do matter).

The biggest tax break for the rich has been the sharp fall in the corporate tax rate

In the 1950s, 1960s, and 1970s, many companies paid about half of their profits to the federal government. The money helped pay for the US military and for investments in roads, bridges, schools, scientific research, and more. "A dirty little secret," said Richard Clarida, an economist now vice chairman of the Federal Reserve, once, "is that corporate taxation used to bring in quite a bit of revenue."

But since the mid-20th century, politicians from both political parties have supported corporate tax rate cuts, often under intense lobbying from corporate America. The cuts have been so big – including with President Donald Trump's tax reform in 2017 – that at least 55 large companies paid zero federal income taxes last year, according to the Institute on Taxation and Economic Policy. Among them: Archer-Daniels-Midland, Booz Allen Hamilton, FedEx, HP, Interpublic, Nike, and Xcel Energy.

The US economy does not appear to function as well when tax rates for the rich are low and inequality high.

Corporate taxes are such an important part of the total taxes paid by the wealthy as much of their assets are mostly stocks. And as business owners, they basically pay corporate tax. Most of their income does not come from a salary or bonus; it comes from the return on their wealth.

"In fact, the only significant burden on these billionaires is the corporate tax they pay through their firms," Gabriel Zucman, an economist and tax specialist at the University of California, Berkeley, told me. "The main reason the US tax system was so progressive before the 1980s is because of the high taxes on corporate profits."

President Biden is now trying to reverse some (but certainly not all) of the corporate tax decline. His plan would include raising the corporate tax rate, penalizing companies that move profits abroad, and introducing a rule designed to prevent companies from paying tax. The money would help fund his infrastructure plan. "It's fair, it's fair, it's fiscal and it pays for what we need," Biden said at the White House yesterday.

Experts and critics already are to increase legitimate ask about his plan, and clearly there will be a discussion about it. Biden said he was open to compromise and other ideas.

But some of the criticism is quite clearly inconsistent with the facts: The protracted drop in corporate tax doesn't seem to have brought much of a benefit to most American families.

For more: If you haven't listened to yesterday's episode of "The Daily" – where Jesse Drucker explains how Bristol Myers Squibb has dodged taxes – I recommend it.

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Lalena Fisher, Ian Prasad Philbrick, Tom Wright-Piersanti and Sanam Yar contributed to The Morning. You can reach the team at [email protected]

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