Why it’s not simple to just raise the corporate income tax

BY KYLE POMERLEAU

It seems like it is conventional wisdom that if Democrats take the White House and the Senate in November the corporate income tax rate is going to go up. Of the six candidates on the debate stage this week, five of them have proposed raising the corporate income tax rate. Despite the widespread agreement, it may not be so obvious. There is at least one issue that Democrats will need to confront: how a corporate tax increase would be scored by the Joint Committee on Taxation (JCT).
Democratic 2020 U.S. presidential candidates (L-R) Senator Elizabeth Warren (D-MA), former Vice President Joe Biden and Senator Bernie Sanders (I-VT) participate in the seventh Democratic 2020 presidential debate at Drake University in Des Moines, Iowa, U.S., January 14, 2020.

An important part of the tax policy process in Congress is getting legislation scored by the JCT. The JCT is an important nonpartisan committee in Congress that assists lawmakers with tax policy. They produce official revenue estimates for all tax legislation considered by Congress. The JCT scored the 2017 tax act multiple times as it moved through Congress.

Another important output from JCT is a distributional table. A distributional table shows how much of a given tax change impacts taxpayers at different income levels. These tables are very informative and show whether a tax change, on net, increases or decreases the progressivity of the US tax system.

Here is the challenge for Democrats, such as Senator Elizabeth Warren (D-MA) who has promised not to increase taxes on the middle class by “one thin dime”: the corporate tax is scored by the JCT as ultimately falling on all households in the form of lower returns on capital income and lower wages. Their estimates are based on their reading of the academic literature.

Below is a sample JCT table measuring the impact of a $10 billion per year increase in the corporate income tax. The table confirms conventional wisdom: a corporate tax increase is primarily paid by higher-income households. However, all households end up shouldering at least some portion of a corporate tax increase. For example, the total tax burden for all households earning between $20,000 and $30,000 would increase by $120 million each year.

Distribution of a $10 Billion Per Year Increase in Corporate Income Taxes

Income Group Total Tax Increase (Millions of Dollars)
$0 – $10,000 $27
$10,000 – $20,000 $71
$20,000 – $30,000 $120
$30,000 – $40,000 $156
$40,000 – $50,000 $224
$50,000 – $75,000 $614
$75,000 – $100,000 $730
$100,000 – $200,000 $2,170
$200,000 – $500,000 $1,894
$500,000 – $1 million $768
$1 million and Over $2,159
Source: Table 10. “Modeling the Distribution of Taxes on Business Income,” JCX-14-13, Joint Committee on Taxation, October 16, 2013.

By no means is this issue insurmountable, but it does require Democrats to make trade-offs. They could use some of the revenue from a corporate tax increase to provide credits for lower- and middle-income households. However, this leaves less revenue for the spending programs that they want to finance. They could also decide to rearrange the entire tax code at the same time to offset a potential tax increase on middle-income households, but is also very challenging.

Kyle Pomerleau is a Resident fellow at the American Enterprise Institute.

Learn more: Joe Biden wants to reintroduce a corporate minimum tax | Cory Booker goes after Elizabeth Warren’s wealth tax | The failure of ‘The Triumph of Injustice’: Understating taxes at the top and incomes at the bottom