John Locke Update / Research Brief

Corporate Tax Elimination Means Relief for Workers

posted on in Economics, Spending & Taxes
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  • The Senate tax plan would continue to build upon the past decade of successful tax reforms
  • Critics say corporate tax elimination only benefits “wealthy corporations”
  • Research shows, however, that workers are the biggest beneficiaries of corporate tax cuts

Earlier this week, Senate Republicans unveiled a tax cut plan that would empower workers by allowing them to keep more of their paychecks and likely lead to higher worker wages.

Included in the plan is a reduction of the personal income tax rate from 5.25% to 4.99%, an increase in the standard deduction of nearly 20%, an increase in the child tax credit, and the direction of $1 billion in federal Covid relief funds toward grants for businesses negatively impacted by Gov. Cooper’s shutdowns.

Likely to be the most contentious part of the plan, however, is a phaseout of the state’s corporate income tax beginning in 2024, with its final elimination slated for 2028. At 2.5%, the corporate income tax rate is the lowest of any state that imposes such a tax.

Predictably, opponents of this initiative are already portraying the move as a “tax cut for wealthy corporations.”

Cooper spokesperson Ford Porter was among the first to read from the script, saying, “The last thing we need is more sweeping tax breaks for corporations and the wealthiest among us instead of investments in our hard-working families and communities.”

But who really benefits from corporate tax cuts?

To answer that question, we need to look beyond who is legally liable for the tax bill to discover who actually bears the burden of a tax. Economists refer to the actual costs or benefits resulting from a change in taxation as the “tax incidence.”

Saying that corporate income tax rate cuts benefit only corporations ignores who is truly impacted by the ways corporations respond to those tax cuts.

A lower state corporate tax rate increases the return on investment in North Carolina, both in absolute terms and relative to other states. In a competitive economy, higher profit rates attract more investment. More new native businesses will be created, and more companies will relocate here from other states to obtain higher returns in North Carolina.

Guess who benefits from this additional investment? Workers who are hired to fill the newly created jobs, and existing workers whose wages increase because investments in capital goods make them more productive.

Indeed, a growing body of evidence shows that the real victims of higher corporate tax rates are workers. As the Tax Foundation has concluded, “In a global economy, where capital is highly mobile but workers are not, labor is bearing the brunt of corporate taxation.”

An October 2018 study released by the National Bureau of Economic Research found that “increases in corporate tax rates lead to significant reductions in employment and wage income.”

A 2020 academic paper released by the Cato Institute estimated that a one percentage point increase in the state corporate tax rate leads to a 0.43% decrease in wages.

The corporate tax penalizes workers, period.

And when the corporate tax isn’t harming workers via suppressed wages, they are stung by higher prices for the goods they buy.

The Cato paper also examined the impact of state corporate taxes on retail prices.

The findings?

…a one percentage point increase in the corporate tax rate leads to a 0.17 percent increase in retail product prices.

In other words, because the corporate tax — a favorite of liberal “progressives” — drives up retail prices, it should be considered as a “regressive” tax because the increase in retail prices harms low-income households disproportionately.

Finally, what about the claim critics will make that “state taxes don’t matter” to businesses making location or expansion decisions?

Try telling that to Apple, the world’s largest corporation, who insisted on nearly a billion dollars’ worth of promised tax breaks to locate their new campus near Raleigh.

Or how about the film industry, which notoriously dried up when their sizeable tax credit program was temporarily converted to a much more modest grant program in 2014?

No change in infrastructure, the education level of the workforce, or quality of life. Just a higher tax burden, and poof, film industry investment dropped by roughly two-thirds in North Carolina.

And recall in 2018 when North Carolina, among many other states, was in a tizzy trying to land the reported “second headquarters” of Amazon.

Amazon itself publicly underscored the importance of taxes to their decision, saying, “A stable and business-friendly environment and tax structure will be high-priority considerations for the Project.”

As these examples, which are among many, show, state taxes do matter. Rather than picking winners and losers by offering tax breaks to a small group of politically selected corporations, North Carolina can incentivize corporations from all industries by zeroing out its corporate income tax.

The above-mentioned research underscores a simple fact: corporations don’t pay taxes; people do. Contrary to what progressives would like you to believe, the corporate tax harms flesh-and-blood working-class people.

In other words, the biggest beneficiaries of a corporate tax cut would be low-income workers and consumers.

Brian Balfour is Senior Vice President of Research for the John Locke Foundation, where he oversees the organization’s research and analysis on a variety of issues. He previously worked for the Civitas Institute for 13 years, and has a master’s… ...

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