Taxing corporations hits investors harder than workers

September 17, 2012

Who pays the corporate income tax?

In a way it's a silly question: Corporations do! But if they didn't have to pay taxes, presumably those corporations would have done something else with the money. That something else could be investing in new equipment, hiring more workers, paying existing workers more (or paying executives more), or paying out more in dividends. And it's really hard to say which of those, or how much of each, corporations would be doing if they didn't have to pay taxes.

This in turn makes it tough to say whether the tax is progressive or not. If the tax mostly prevents hiring or wage increases, it's very regressive. But if it mostly prevents dividend payments and CEO bonus checks, then it's very progressive. In econospeak, it's really hard to determine what the "incidence" of the corporate income tax is. It's not obvious who it hits hardest.

Jim Nunns at the Tax Policy Center has taken a stab (pdf) at figuring out who the tax hits. A reasonable estimate, he judges, is that 20 percent of the tax hits labor costs like wages and other compensation, another 20 percent hits investors in bonds and other non-stock instruments, and 60 percent hits shareholders. That is, 80 percent hits capital income and 20 percent hits labor income.

Nunns used this assumption to figure out which income groups pay most of the tax. The answer? The vast majority of Americans pay an effective rate between 1 and 2 percent, and unless you're in the top 1 percent, you pay under 4 percent of your income in corporate taxes. But if you make over $2.8 million a year, you pay a much larger fraction:

The corporate income tax, then, is a very progressive tax on investment income. There are some strong theoretical reasons why some economists, like AEI's Alan Viard and Harvard's Martin Feldstein, prefer lower rates on investment income as a way to promote long-run growth, though some, like Michigan's Joel Slemrod, find the evidence that low taxes on investment income help growth to be lacking. But Nunns's findings are an important reminder that everyone pays some of the corporate income tax, even as those on the top pay the vast majority of it.

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Brad Plumer · September 17, 2012