Earlier this week, I testified in front of the Joint Economic Committee on the topic of assessing the recovery after five years.
As you can imagine, congressional testimony can be pretty frustrating these days for members of the fact-based community, but I thought this one covered a lot of useful ground with substantive disagreements as to the way forward. One exception, however, was the part of the discussion that veered into the fantasy that you could help the recovery reach more people by cutting the corporate tax rate.
Let me be quite clear that our corporate code is a mess, fraught with loopholes and incentives to engage in deep tax avoidance, which is precisely what many firms do — at least the ones who can afford it, like GE, which employs 975 tax avoider-analysts. I’m a big advocate of cleaning out the code, and am even willing to join the general consensus to achieve revenue-neutral reform through broadening the base and lowering the rate.
But don’t kid yourself, as too many members of the congressional panel seemed to do, that lowering the marginal rate on corporate taxation would somehow help the middle class.
There are two ways that lowering taxes on business-generated income — from interest, dividends and capital gains — could reach the middle class on down. First, through trickle-down: Cut taxes on the holders of corporate income, and you'll allegedly trigger large, positive responses in investment, jobs and higher pay for wage earners. It’s a pleasing story, but one that’s been largely debunked by both research and history.
Second, if the corporate income sources noted above reached lower-income groups, then cutting corporate taxes would directly lower their tax liabilities and raise their disposable incomes, a view that seemed to be held by some members of the congressional panel.
But the evidence shows that to be wrong. The figure below from CBO shows the percent of corporate income going to households ranked by where they are in the income scale.
Back in 1979, even before inequality took off, the share of corporate income held by the bottom 80 percent of households was about the same as the share held by the top 1 percent (both held about 30 percent of business income). Since then, the share going to the bottom 80 percent fell from 30 percent to 20 percent, while that of the top 1 percent rose to 50 percent. These data only go through 2010, but in that year the distribution of corporate income was the most skewed-toward-the-top on record.
In other words, if the goal of economic policy is to help connect the middle class to the economic recovery, cutting corporate taxes is not the horse to bet on. And unless policy makers are truly committed to at least revenue neutrality, which, by the way, means some firms end up with higher tax liabilities than under current law, cutting corporate tax rates can be counted on to reduce revenues, and increase both fiscal pressures and after-tax income inequality.
No one should confuse that with helpful policy for our time.