Cost of Democrats’ Corporate-Tax Increase Skews to Wealthy, Reaches Middle Class

Cost of Democrats’ Corporate-Tax Increase Skews to Wealthy, Reaches Middle Class #Cost #Democrats #CorporateTax #Increase #Skews #Wealthy #Reaches #Middle #Class Welcome to Lopoid

WASHINGTON—When Congress raises corporate taxes, companies send money to the Internal Revenue Service. The economic impact doesn’t end there.

What happens next—and how much of that higher tax burden falls on workers—is at the center of the Senate debate over Democrats’ fiscal agenda. Republicans and business groups, who oppose the proposal, point to official estimates showing tax increases for middle-income households.

The potential tax hike—a new 15% minimum corporate income tax on large profitable companies—could raise $313 billion over a decade from about 150 companies annually to help pay for Democrats’ climate-change and healthcare programs, according to the nonpartisan congressional Joint Committee on Taxation. Business groups such as the U.S. Chamber of Commerce and the Arizona Chamber of Commerce and Industry are warning that the tax would deter investment, and they’re mounting campaigns to sway undecided Sen.

Kyrsten Sinema

(D., Ariz) against the legislation. The bill, dubbed the Inflation Reduction Act, might get a Senate vote as soon as this week.

The proposed tax wouldn’t raise taxes directly on middle-class households on their individual returns. But higher taxes typically add costs elsewhere and those can affect individuals. That can include smaller profits for shareholders or lower wages paid to workers.

A report from the committee projected burdens from the proposal rising up and down the income scale, such as a $2.5 billion total increase among households making between $75,000 and $100,000 in 2023. That would be less than a 1% increase in taxes.

“The mislabeled ‘Inflation Reduction Act’ will do nothing to bring the economy out of stagnation and recession, but it will raise billions of dollars in taxes on Americans making less than $400,000,” said Sen.

Mike Crapo

(R., Idaho).

That $400,000 threshold is the line below which President Biden promised no tax increases. Democrats have consistently said they mean direct tax increases, not the economic effect of corporate tax hikes.

Treasury Secretary

Janet Yellen

said Tuesday, in a letter to House Speaker

Nancy Pelosi,

that the bill “would either reduce or have no effect” on the taxes paid by families with income less than $400,000. She added that tax credits included in the bill will cut taxes for millions of Americans.

At the corporate level, half the money would come from manufacturers, broadly defined, according to the taxation committee. About half of that money from manufacturers would come from the pharmaceutical, technology and apparel industries, according to separate taxation committee estimates released Tuesday. Democrats emphasized this effect and the direct taxes on companies.

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“These companies are playing the most games, and avoiding tax by manufacturing their drugs, phones, and shoes abroad,” Senate Finance Committee Chairman

Ron Wyden

(D., Ore.) said. “This is a minimum tax for tax dodgers stamping ‘Made in China’ on their products.”

Economists agree that the impact of the tax doesn’t stop with companies, though experts have long struggled to determine the exact so-called incidence of the corporate income tax, which eventually filters its way to individuals.

The taxation committee assumes that 75% of the tax is borne by capital and 25% by labor. That means that the bulk of the tax burden is shouldered by business owners, including individual shareholders, but a quarter is paid, indirectly, as wages rise more slowly than they would otherwise. The Treasury Department assumes 82% goes to capital. When advocating for tax cuts that passed in 2017, the Trump administration said as much as 70% of the burden was paid by workers.

Those capital holders include foreigners and tax-exempt entities such as university endowments. And, like all forms of wealth, corporate stock ownership is tilted toward the top of the income distribution.

But people at all income levels own stocks, often through 401(k) plans or other retirement accounts. Shareholders could get smaller dividends or lower returns if the tax is enacted, even if none of the impact is ultimately filtered to workers through lower wages.

Middle-income Americans have built up less savings, lost more in the market downturn and face higher average inflation in 2022. WSJ’s Dion Rabouin uses three key data points to explain. Illustration: Ryan Trefes

“It’s really skewed to the top but it’s not zero way down in the income distribution,” said Richard Prisinzano, a former Treasury Department tax economist who is now director of policy analysis at the Penn Wharton Budget Model.

The taxation committee analysis released thus far looks only at part of the bill, and it doesn’t include the effect of extending health-insurance subsidies under the Affordable Care Act or changes to prescription-drug pricing. And in some years toward the end of the decade, new or expanded tax breaks—such as those for renewable energy and electric vehicles—would be slightly larger than the tax increase.

The analysis also doesn’t include the broader value judgments about trade-offs. From Democrats’ perspective, the benefits of renewable-energy incentives and healthcare subsidies are worth the potential costs.

“Opponents’ hand is so weak they’re forced to argue that a modest minimum tax on the largest multinational corporations will be paid by working-class people and not corporate shareholders,” said

Chuck Marr,

vice president for federal tax policy at the Center on Budget and Policy Priorities, a liberal-leaning think tank. “That sounds like a pretty rough town hall meeting.”

According to an analysis from the conservative-leaning Tax Foundation that included more provisions, after-tax incomes would increase for all income groups in 2023 and 2032, the two years they examined, because the healthcare subsidies and energy incentives outweigh the tax increase. After accounting for economic effects, the Tax Foundation estimates that long-run gross domestic product would be slightly lower than it would be without the proposal and after-tax income would be lower for all income groups.

Sen. Joe Manchin (D., W.Va.) argues that the proposal isn’t a tax increase and just closes “loopholes.”

Photo:

Anna Moneymaker/Getty Images

Some Democrats have taken a different rhetorical approach. Sen. Joe Manchin (D., W.Va.), the pivotal senator who agreed to the new tax, argues that the proposal isn’t a tax increase and just closes “loopholes.” That’s a term often used for crafty yet legal maneuvers to avoid a tax using gaps in the way a law is written.

The tax increase proposal is a much blunter instrument than that Messrs. Wyden and Manchin suggest. In some cases, the tax might indeed fall on companies paying low tax rates abroad.

But it also claws back intentional tax incentives that Congress created, not by repealing or amending them but by denying them if companies use them too much. Namely, it takes back the benefits of accelerated depreciation for capital investment, such as spending on factories and equipment in the U.S. That change could discourage companies from making some future investments.

The bill could also limit how much companies use a tax benefit for serving foreign markets from the U.S. Companies may also be affected in hard-to-predict circumstances where tax and financial accounting differ.

“It’s been tried before. It was tried in the ’80s and two years later they reversed it, and they saw then it didn’t work,” said Rep. Jason Smith (R., Mo.), the top Republican on the House Budget Committee, referring to a minimum tax on financial-statement income that Congress created and then repealed. “The minimum tax would destroy U.S. manufacturing.”

Write to Richard Rubin at richard.rubin@wsj.com

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