Corporate income tax is the most harmful tax for economic growth

Empirical evidence shows that the corporate income tax is the most harmful tax for economic growth and, despite what you may think, workers bear a sizable portion of its burden.

That's because as the corporate income tax goes up, so does the cost of capital—things like machinery, equipment, and factories. The more expensive it is for businesses to invest in capital, the less productive workers are and, as a result, the demand for labor decreases.

The Tax Foundations's special report on interactions between corporate income tax and labor costs in the U.S. concludes that  nearly all the burden of the corporate tax falls on labor. Over the last few decades, economists have used empirical studies to estimate the degree to which the corporate tax falls on labor and capital, in part by noting an inverse correlation between corporate taxes and wages and employment. These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome. 

As the tax reduces investment, productivity, and wages, the dollar amount of the cost to labor may exceed the revenue raised by the tax by a wide margin. This evidence squares with the bulk of the theoretical discussions of earlier decades predicting that capital flight would shift the burden of the corporate income tax to labor. The increasing integration of the world economy in the production of traded goods and services and in the integration of financial markets reinforces the assumptions of these early analysts. According to the empirical work, capital is a highly mobile and sensitive input; it can be located in the United States or overseas, or it might not be formed at all. Labor is less free to move from one country to another than is capital, and workers have limited freedom to set their own hours, or skip work entirely, if they want to earn income. Capital can and will flee high-tax jurisdictions, leaving labor behind to suffer the consequences. Capital can and will grow in jurisdictions that lower the tax burden, benefiting labor more than any other group.

Add a comment

Email again: