Reminder that Corporate Taxes Are the Most Economically Damaging Way to Raise Revenue

In the rush to pass the Inflation Reduction Act, which features an ill-conceived tax on the book income of U.S. corporations, it is worth reminding policymakers of a well-established finding in the economic literature: that among all the major ways to raise revenue, increasing the corporate tax is the most economically destructive due to its impact on incentives to invest.

Economists have found in more than two dozen published studies that corporate taxes harm economic growth. An OECD study examining data from 63 countries concluded that corporate income taxes are the most economically damaging way to raise revenue, followed by individual income taxes, consumption taxes, and property taxes. A study on taxes in the United Kingdom found that taxes on consumption are less economically damaging than taxes on corporate and individual income. A study of U.S. tax changes since World War II found that a 1 percentage point cut in the average corporate tax rate raises real GDP per capita by 0.6 percent after one year, a somewhat larger impact than a similarly sized cut in individual income taxes. Based on U.S. state taxes, a study found that a 1 percentage point cut in the corporate tax rate leads to a 0.2 percent increase in employment and a 0.3 percent increase in wages.

While the Inflation Reduction Act book tax is an unconventional way to raise corporate taxes, that doesn’t make it any less economically destructive. In fact, it falls particularly heavy on companies using accelerated depreciation provisions, especially bonus depreciation, that are shown to be very effective at stimulating investment. Economists Eric Zwick and James Mahon found that the bonus depreciation policies in the early 2000s raised qualifying capital investment by 10 percent in the years they were in effect, and then increased investment by 16 percent near the end of the decade when the policy was reinstated and expanded. Economist Eric Ohrn and coauthors came to similar conclusions when looking at the impact of bonus depreciation on the manufacturing sector, finding that the policy increased capital formation by about 8 percent and employment by almost 10 percent, with gains concentrated among production workers.

Furthermore, several studies demonstrate that the corporate tax is borne in part by workers. For instance, a study of corporate taxes in Germany found that workers bear about half of the tax burden in the form of lower wages, with low-skilled, young, and female employees disproportionately harmed.

The corporate tax is also borne by owners of shares, including retirees and others earning considerably less than $400,000. In the short run, the Joint Committee on Taxation (JCT) assumes owners of capital bear all of the corporate tax, yet that includes more than 90 million tax filers earning less than $200,000. In the long run, JCT assumes workers bear a portion of the corporate tax, such that the burden falls on more than 150 million tax filers earning less than $200,000.

While there is always a populist appeal to raising corporate taxes, based on the misunderstanding that the burden is somehow only felt by a small number of rich people, it is the job of economists to remind people of the facts and resist political efforts that have no basis in economic reality. Corporate taxes do not come freely but rather at the expense of more investment, more job opportunities, and higher wages. Raising corporate taxes now at a time of economic uncertainty and a slowing economy as the Inflation Reduction Act does would be particularly irresponsible.