Oct 17, 2017

GOP corporate tax cuts benefit the wealthy, but could help workers too

The GOP tax plan framework, released last month, almost undoubtedly benefits the wealthy — and that's largely because of the corporate tax provisions. "It's not that this tax plan is a huge direct tax cut to rich individuals, it's that it's a huge tax cut to businesses, and those businesses are owned by rich individuals," said Marc Goldwein of the nonpartisan Committee for a Responsible Federal Budget.

Yes, but: Conservative economists emphasize that while the wealthy may directly benefit the most from corporate tax cuts, workers will ultimately benefit too from higher wages and more jobs. That's the argument that will really drive the debate when Congress considers the tax plan.

Data: Tax Policy Center; Chart: Andrew Witherspoon / Axios

What you need to know about the GOP plan: It makes changes to all aspects of the tax code. Here are a few major provisions:

  • Condenses the individual tax code into three brackets: 12, 25 and 35 percent. (It hasn't yet defined which incomes qualify for what bracket.) It leaves the potential for a fourth rate on the highest earners.
  • Reduces the corporate tax rate from 35 percent to 20 percent.
  • Allows immediate writing off of capital investments for five years.
  • Establishes a "pass-through" business rate of 25 percent. Currently, pass-through business income is taxed at filers' individual rate.

Why the wealthy benefit: Economists generally don't dispute that in an immediate sense, the GOP tax plan disproportionately benefits the wealthy.

  • Reducing the pass-through rate is a pretty straightforward benefit to the wealthy. Under the new tax structure, only higher-income people being taxed at the 35 percent rate will benefit from a lower (25 percent) pass-through rate.
  • Economists disagree about who pays what amount of corporate taxes. But it's generally accepted that shareholders and capital owners pay more of the corporate tax than workers, so therefore would benefit more from a tax reduction than workers would.
  • On the other hand, of course the wealthy benefit from tax cuts— they pay much more in taxes than lower income people, who often don't pay any taxes. "You cannot do individual income tax policy without talking about the affluent because they're the ones who pay tax," said Doug Holtz-Eakin, president of the American Action Forum. Wealthier people also own businesses.

How workers could benefit: This is where economists start to significantly disagree.

  • A Council of Economic Advisers report released yesterday found that reducing the corporate tax rate to 20 percent would increase average household income by $4,000 a year. (Liberal economists disagreed.)
  • When corporate rates are lowered, this results in more jobs, higher wages and more benefits, former Senate Finance aide Chris Condeluci told me. "As more people are spending money in the economy, it's almost like a rising-tides-raises-all-boats," he said.
  • However, different income brackets may see results at different times. "The corporate cuts today benefit today's shareholders, and the effects for workers will take a very long time to show up," said Adam Looney of the Brookings Institution.
  • Some say if the plan increases the federal debt, this cancels out benefits to the middle class. "Higher debt depresses wage growth," Goldwein said.
  • Economists generally agree that the provision of the plan allowing faster write-offs for capital investments will have a large positive impact on workers.

The politics: It's going to be hard for Republicans to escape from being accused of cutting taxes for the wealthy, because they are. But conservatives strongly believe this is how to best help the middle class, even if they won't win the short-term politics of the issue.

  • Acknowledging this, Holtz-Eakin said, "All you have to do is get 51 votes in the Senate, and then the economy will win the political argument."
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