Who
Pays Corporate Tax?
The direct burden of corporate tax, of course, falls on the shareholders, including people who invest in stock through their pension savings accounts. But over time the burden of corporate tax also falls on employees through lower wages and upon consumers through higher prices.
How does this work? Corporate managers do NOT say "gee, corporate tax rates have just been lowered, let's give our employees bigger bonuses and cut our prices!" Instead, it works through the way corporations make decisions.
Corporations compete against each other for investment capital. If a corporation does not provide a certain level of return to its shareholders, then people will tend to sell the stock of the under performing company and buy shares in other companies instead. So, when a corporation is deciding whether or not to make an investment, it first produces a set of projected economics to judge what kind of risk weighted, after tax return it is likely to make on the investment. If the projected return is above a cut-off number, commonly known as the hurdle rate, the corporation will make the investment. If the projected return is below the hurdle rate, the corporation will hold on to its cash instead.
Say a given investment will earn $100 before tax on an investment of $85 (i.e. it will get a return of its $85 investment plus another $15 in profit), and that the corporation has a 15% hurdle rate. If the corporation was not subject to tax, it would make the investment. It will make $15 beyond its $85 investment, and $15 is more than 15% of $85, so it will go forward with the deal. But now suppose that the corporation is subject to a 35% tax. That tax will only apply to the net profit of $15, but still it will be $5.25. So, now the after tax profit will be only $15-$5.25=$9.75. $9.75 is only 11.5% of the $85 investment, well below the 15% hurdle rate. So, with tax, the corporation will not make the investment.
Why do we care? We care because every corporation out there is making similar decisions. If corporations operating within the American economy were not subject to tax, they would decide to invest capital in many projects that they would not invest in today. Those projects would compete for employees, and they would provide goods and services that would compete against each other in the marketplace.
What does that mean to you? If more companies have more projects in America seeking to hire American workers, that increases the market power of each worker. That means that the corporations will have to share some of that profitability with their workers in the form of better wages and benefits. The income stagnation that the middle class has seen for the last 30 years due to their shrinking market power would be reversed. Working Americans would get a bigger piece of the bigger economic pie. What the globalized labor market has taken away, the energized labor market created by Shared Economic Growth would give back.
If more companies are willing to take the risk of entering the market to produce competing goods, that heightened competition will result in better products at lower prices. The average person's dollar would go farther, again helping to undo the effects of income stagnation.
Both of these effects would get a boost from the general efficiency gains that the Shared Economic Growth proposal would produce. By stimulating corporations to pay their earnings out as dividends, investment dollars would be freed up to flow to the best new investments in the overall economy, instead of the best investment that happens to be available to a particular corporation (or the best foreign investment available to that corporation). By eliminating the incentive for corporations to move their technology out of the U.S., Shared Economic Growth would help us to become the world's innovation powerhouse again. By providing American workers with their fair share of the benefits of their labor, Shared Economic Growth would stimulate worker enthusiasm and involvement, boosting real productivity.
Thus, while the benefits of Shared Economic Growth would initially fall to the shareholders, including the pension funds that own 28% of U.S. shares, as the new investments matured it would flow out to the workers and consumers across the economy. The burden of corporate tax falls on all of us, and lifting that burden in favor of shareholder level taxes would make everyone better off.
Wouldn't that be more sensible?
The direct burden of corporate tax, of course, falls on the shareholders, including people who invest in stock through their pension savings accounts. But over time the burden of corporate tax also falls on employees through lower wages and upon consumers through higher prices.
How does this work? Corporate managers do NOT say "gee, corporate tax rates have just been lowered, let's give our employees bigger bonuses and cut our prices!" Instead, it works through the way corporations make decisions.
Corporations compete against each other for investment capital. If a corporation does not provide a certain level of return to its shareholders, then people will tend to sell the stock of the under performing company and buy shares in other companies instead. So, when a corporation is deciding whether or not to make an investment, it first produces a set of projected economics to judge what kind of risk weighted, after tax return it is likely to make on the investment. If the projected return is above a cut-off number, commonly known as the hurdle rate, the corporation will make the investment. If the projected return is below the hurdle rate, the corporation will hold on to its cash instead.
Say a given investment will earn $100 before tax on an investment of $85 (i.e. it will get a return of its $85 investment plus another $15 in profit), and that the corporation has a 15% hurdle rate. If the corporation was not subject to tax, it would make the investment. It will make $15 beyond its $85 investment, and $15 is more than 15% of $85, so it will go forward with the deal. But now suppose that the corporation is subject to a 35% tax. That tax will only apply to the net profit of $15, but still it will be $5.25. So, now the after tax profit will be only $15-$5.25=$9.75. $9.75 is only 11.5% of the $85 investment, well below the 15% hurdle rate. So, with tax, the corporation will not make the investment.
Why do we care? We care because every corporation out there is making similar decisions. If corporations operating within the American economy were not subject to tax, they would decide to invest capital in many projects that they would not invest in today. Those projects would compete for employees, and they would provide goods and services that would compete against each other in the marketplace.
What does that mean to you? If more companies have more projects in America seeking to hire American workers, that increases the market power of each worker. That means that the corporations will have to share some of that profitability with their workers in the form of better wages and benefits. The income stagnation that the middle class has seen for the last 30 years due to their shrinking market power would be reversed. Working Americans would get a bigger piece of the bigger economic pie. What the globalized labor market has taken away, the energized labor market created by Shared Economic Growth would give back.
If more companies are willing to take the risk of entering the market to produce competing goods, that heightened competition will result in better products at lower prices. The average person's dollar would go farther, again helping to undo the effects of income stagnation.
Both of these effects would get a boost from the general efficiency gains that the Shared Economic Growth proposal would produce. By stimulating corporations to pay their earnings out as dividends, investment dollars would be freed up to flow to the best new investments in the overall economy, instead of the best investment that happens to be available to a particular corporation (or the best foreign investment available to that corporation). By eliminating the incentive for corporations to move their technology out of the U.S., Shared Economic Growth would help us to become the world's innovation powerhouse again. By providing American workers with their fair share of the benefits of their labor, Shared Economic Growth would stimulate worker enthusiasm and involvement, boosting real productivity.
Thus, while the benefits of Shared Economic Growth would initially fall to the shareholders, including the pension funds that own 28% of U.S. shares, as the new investments matured it would flow out to the workers and consumers across the economy. The burden of corporate tax falls on all of us, and lifting that burden in favor of shareholder level taxes would make everyone better off.
Wouldn't that be more sensible?
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