Friday, October 18, 2013

Corporate Tax Slows GDP And Wage Growth

From Tax Foundation, "JCT: Corporate Tax Falls Partly on Labor" by William McBride:
First, capital and labor are the main inputs to production, and they are complementary, meaning taxing capital ultimately hurts workers. Think of how unproductive you’d be without computers, and how much less you’d get paid. Now think of where computers come from: companies that pay corporate tax. Raising the corporate tax on them reduces the number of computers produced. The chart below, from an economics textbook, shows what happens to workers' wages when there is less capital per worker.

Second, on average workers get about two-thirds of GDP growth in the form of wages, and capital gets about one-third. Taxing capital does not change that ratio, it just reduces GDP growth, thus reducing wage growth.

Third, capital is the most sensitive input to taxes. Capital is more mobile than labor, meaning capital can relatively easily move across borders to avoid taxes. Investors are also more sensitive to after-tax returns, so when faced with higher taxes on capital income they simply invest less and consume more. Most workers do not have the luxury of working considerably less when their after-tax wages go down.

Fourth, consistent with these results, most empirical studies find corporate taxes, and other taxes on capital, are the most harmful to economic growth. And since slower economic growth translates into slower wage growth, studies find that corporate taxes reduce wages.

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