Note: The following is the testimony of Dr. William McBride, Tax Foundation Vice President of Federal Tax and Economic Policy, prepared for a Joint Economic Committee hearing on October 6, 2021, titled, “Building Back Better: Raising Revenue to Invest in Shared Prosperity.”
Chairman Beyer, Ranking Member Lee, and members of the Joint Economic Committee, thank you for inviting me to testify today.
I am Dr. William McBride, Vice President of Federal Tax and Economic Policy at the Tax Foundation, and today I will share the key findings of our analysis of the most recent iteration of the President’s Build Back Better Agenda.
There are three primary takeaways from our analysis. The first is that the corporate tax is not just paid by corporate shareholders: raising the corporate tax rate will reduce investment and productivity growth, ultimately leading to lower wages across the board.
The second is that further increasing the progressivity of the tax code by raising individual income taxes for high-income earners comes with a cost: it will reduce incentives to work, save, and invest, broadly reducing employment opportunities throughout the economy.
And lastly, the tax code is not an effective tool for social policy: optimal tax policy raises the amount of revenue needed while creating minimal economic costs, and other goals are better addressed through proper spending programs.
Point 1: Raising Corporate Income Taxes Will Reduce Investment in America
Raising corporate income taxes has a large negative impact on the U.S. economy, because it reduces the after-tax return on corporate investment, reducing incentives to invest. As investment shrinks, worker productivity declines along with wages and hiring.
Our modeling of the Ways and Means Committee’s latest Build Back Better proposal found that the plan would reduce the size of the economy by about 1 percent in the long run, shrink the capital stock by 1.8 percent, cut wages by 0.7 percent, and cost more than 300,000 jobs. While the proposal would increase tax revenue by about $1.06 trillion over 10 years, conventionally estimated, in the long run it would reduce GDP by more than $2 for every $1 raised.
The revenue and economic impacts are largely driven by the plan’s increase of the corporate tax rate to 26.5 percent, which would reduce long-run GDP by 0.6 percent, the capital stock by 1.1 percent, wages by 0.5 percent, and cost over 100,000 jobs.
|Long-Run Gross Domestic Product||-0.98%|
|Long-Run Gross National Product||-1.01%|
|Full-Time Equivalent Jobs||-303,000|
|Conventional Revenue (10-Year)||$1.06 trillion|
|Dynamic Revenue (10-Year)||$804 billion|
Source: Tax Foundation General Equilibrium Model, September 2021.
|Raise the Corporate Tax Rate to 26.5 Percent||International Provisions (combined)|
|Long-Run Gross Domestic Product||-0.6%||-0.1%|
|Long-Run Gross National Product||-0.5%||-0.1%|
|Full-Time Equivalent Jobs||-107,000||-12,000|
|Conventional Revenue (10-Year)||$704 billion||$136 billion|
Source: Tax Foundation General Equilibrium Model, September 2021.
The international tax increases on U.S. multinationals (MNEs), including higher taxes on Global Intangible Low-taxed Income (GILTI) and a new limit on interest expense, further reduce the size of the economy by about 0.1 percent, the capital stock by 0.2 percent, wages by 0.1 percent, and jobs by 12,000. Higher GILTI taxes reduce the incentive of U.S. MNEs to invest in research and development (R&D) in the U.S. due to reduced after-tax income from intellectual property (IP) that has been located abroad. There is an additional effect of higher international taxes that we have not modeled (due to a lack of data): the reduction in American incomes arising from the incentive of U.S. MNEs to avoid the international tax increases by selling foreign assets to foreign competitors.
The international tax increases are intended to reduce profit shifting, i.e., the ability of U.S. MNEs to shift profits abroad where taxes are lower. However, we find that profit shifting would be made worse by the bill, as it would increase taxes on domestic income more than it would on foreign income. Specifically, the bill raises the statutory corporate tax rate 5.5 percentage points and raises the tax rate on Foreign Derived Intangible Income (FDII), while raising the effective tax rate on foreign income by between 2.4 and 5.1 percentage points over the budget window. On net, we estimate increased profit shifting by U.S. MNEs reduces revenue by $57.9 billion over a decade.
These estimates do not include the benefits of infrastructure, since that is not included in the House reconciliation bill. However, in our modeling of the American Jobs Plan, which included about $1.7 trillion in infrastructure spending as well as a higher corporate tax rate of 28 percent among other tax increases, we found that plan would on net reduce GDP by 0.5 percent and cost more than 100,000 jobs.
The negative impact of corporate taxes on economic growth is well-documented. 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.
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 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.
In its distributional analysis of the House bill, including the corporate taxes, the JCT finds that 34.8 percent of…
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