Is the Corporate Tax Progressive?

By :: February 22nd, 2010

Economists can't seem to agree about whether the corporate tax falls on the rich or the poor. We pretty much concur that sales and payroll taxes are regressive and that income and estate taxes are progressive, but we argue endlessly about whether the burden of the corporate tax falls more on the wealthy or the middle class.

This is an important question because progressivity—the notion that the wealthy pay a proportionately higher share of the tax—is one justification for having a corporate tax in the first place. To my mind, for all of its flaws, the corporate tax is progressive.

The heart of the progressivity question is the issue of corporate tax incidence. That is, who really pays the corporate tax? While a corporate officer may sign the check to the IRS, the money to pay the bill either comes from workers or capital owners (or both). Conventional wisdom among economists is that the corporate tax is regressive if it leads to lower wages and progressive if it leads to lower returns to capital.

Many economists have tried to sort out where the incidence falls, but their conclusions are all over the map. Some theoretical papers conclude that the corporate tax falls primarily on labor through lower wages. Others report the tax falls mostly on capital through lower returns to investors. And still others say both labor and capital pay a share. A series of empirical papers finds that the corporate tax burden does lead to lower wages, though they generally don't agree about why.

This is an important debate, but when it comes to progressivity, it may not matter much. That's because whether the tax hits wage-earners or capital owners, it still falls disproportionately on wealthy individuals. Why? Because wealthy households tend to have substantial income from both wages and capital. Workers who have high wages also tend own a lot of capital, and investors with a lot of capital usually (though not always) have high wages.

Additional details are presented here, but the bottom line is simple: The corporate tax is generally progressive whether it falls 80 percent on labor, for example, or 80 percent on capital, or is split evenly between the two. While these assumptions may affect the degree of progressivity, the tax is still disproportionately paid by wealthier households.

This doesn't mean the corporate tax is perfect. The merit of a tax depends not only on fairness, but also compliance and efficiency. By these criteria the corporate tax comes up short. For example, just about everyone agrees the tax is inefficient due to a toxic mix of a high tax rate, a diluted tax base, and a host of tax provisions that distort corporate behavior. But at least it's progressive, and that's true whether the tax is paid by labor or capital.

5Comments

  1. Anonymous  ::  3:47 pm on February 22nd, 2010:

    The Corporate Tax treats some employers differently than others who are similary situated. Enacting a broader Business Income Tax could solve this problem – especially if you separate such a tax from individual personal income taxation at the higher end and use it to replace low rate personal income taxes and at least a portion of payroll taxes. In other words, turn it into a VAT or a pair of VATs (one receipt based to fund discretionary spending and one subtraction based to fund entitlement spending and tax benefits to families – the remaining income surtax would fund military deployments and debt finance/repayment).
    Hopefully the Bowles'Simpson Commission will look at such an option. I would like to see how it would score. Of course, if TPC wants to score it or hire me to do so, such a development would be most welcome (indeed, I see no reason why holding office is a prerequisite to the search for a better fiscal solution).

  2. Anonymous  ::  5:43 pm on February 22nd, 2010:

    Corporate taxes of all sorts are politically efficient: They win votes. Even if economists agreed on the incidence of the tax, voters would probably never catch on that they are paying the tax. For proof, consider how many people think their health insurance is provided for free by their employers, or how many people believe that the employer's half of FICA taxes costs the employee nothing.

  3. Anonymous  ::  8:02 pm on February 22nd, 2010:

    This is why, given my druthers, I would use a subtraction VAT for all domestic and entitlement spending. Proposing a receipt rather than a subtraction VAT for discretionary spending is a compromise toward transparency. To really sell this to the GOP, make VAT rates regional along with discretionary spending (including military spending to keep Dems on board) with a balance requirement for each region. Including employer offsets for the Subtraction VAT funding entitlements would also make what I propose attractive to conservatives – especially if almost all of the tax could be set aside by child credits, employee health care, employee training, insured private defined benefit and disability plans and retireee health care in lieu of taxes.

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  5. arie  ::  5:42 am on March 11th, 2015:

    Very enlightening
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