Senators Elizabeth Warren (D-Mass.), Angus King (I-Vt.) and Ron Wyden (D-Ore.) have introduced legislation to create a 15 percent minimum tax on American businesses that they are pushing to include in President Biden’s multi-trillion reckless tax and spend plan.
This tax increase is based on the premise that corporations exploit tax loopholes to pay zero income tax every year. In reality, businesses utilize legal tax deductions and credits that were created on a bipartisan basis to promote investment, job creation, and growth.
For instance, corporations utilize full business expensing to deduct the cost of new equipment and investment. There are several benefits to this policy. First, it incentivizes new investment, leading to greater economic productivity, job growth and higher wages. Second, it simplifies the tax code by equalizing the tax treatment of new investments with other business expenses such as wages, rent, and healthcare costs.
There is strong bipartisan support for this policy. Former Obama Economic Adviser Jason Furman has long supported full business expensing, and the policy was included in several Obama budgets (albeit as part of a net tax increase). In addition, the Obama White House correctly noted that the provision would help businesses and workers in press releases and fact sheets:
“If a business bought an additional $1 million worth of equipment next year, they would be able to deduct the full $1 million up front, potentially accelerating hundreds of thousands of dollars in tax cuts. That’s real money that businesses… could use to expand or hire new workers right now, and provides a strong incentive to increase investment now, creating even more jobs.”
Corporations can also deduct stock compensation granted to employees. This is only a good thing – it gives workers more wealth and may actually leave the government better off because the income is taxed as ordinary income and therefore at a higher rate than the corporate tax.
In addition, businesses can deduct net operating losses (NOLs) and can carryforward unused losses to future years. This provision ensures that businesses large and small do not pay taxes when they do not make money. There is strong bipartisan support for this tax treatment with NOLs having been expanded during periods of economic downturn including in 2008 and 2009 when Democrats had control of both chambers of Congress and the White House.
It is also important to note that companies are not literally paying zero taxes. They still pay state taxes as well as the 6.2 percent Social Security and 1.45 percent Medicare payroll taxes on employee wages.
This tax increase will ultimately harm the economy and working families. Businesses will not absorb the cost of this tax increase, but will pass it along to workers and consumers.
First, increasing taxes on corporations will cause businesses to invest less in the United States and more overseas (or not at all), resulting in fewer job opportunities and lower wages for American workers:
- According to the Stephen Entin of the Tax Foundation, labor (or workers) bear an estimated 70 percent of the corporate income tax in the form of wages and employment.
- A Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.”
- The non-partisan Joint Committee on Taxation recently affirmed in congressional testimony that the corporate tax rate hike will fall on “labor, laborers.” Testifying before the House Ways & Means Committee, JCT Chief of Staff Thomas A. Barthold said: “Literature suggests that 25% of the burden of the corporate tax may be borne by labor in terms of diminished wage growth.”
- Even the left-of-center Tax Policy Center estimates that 20 percent of the burden of the corporate income tax is borne by labor.
In addition, raising taxes on corporations will increase the cost of goods and services.
A 2020 study by the National Bureau of Economic Research found that 31% of the corporate tax falls on consumers. Additionally, customers directly bear the cost of corporate income taxes imposed on utility companies. In this way, customers would have to pay more for their utility use.
Inflation has already raised the cost of goods and services for American families. The consumer price index increased by 5.4 percent on an annualized basis in September, matching a 13-year high, according to the Bureau of Labor Statistics (BLS). In January 2021, before Joe Biden took over the presidency, annual inflation was at a stable 1.4 percent.
As noted by BLS, the cost of many goods and services have increased significantly over the past year:
- Gasoline has increased 42.1 percent in the past 12 months.
- Used cars and trucks have increased 24.4 percent in the past 12 months.
- Meats have increased 12.6 percent in the past 12 months.
- Fresh fish and seafood have increased 10.7 percent in the past 12 months.
- Bacon has increased 19.3 percent in the past 12 months.
- Eggs have increased 12.6 percent in the past 12 months.
- Furniture and bedding have increased 11.2 percent in the past 12 months.
- Children’s footwear has increased 11.9 percent in the past 12 months.
Raising taxes on businesses through a 15 percent minimum tax will make this inflation worse. It will undo important, pro-growth deductions, threaten jobs and wages, and harm working families.