- The true impact of tax changes cannot be determined merely by looking at the changes in the legal tax liability
- Tax changes alter people’s behavior
- Who is impacted by these changes in economic behavior, and how they are impacted, is the true measure of a tax change’s impact
Everyone seems to be talking taxes these days. President Trump recently released his proposed tax changes, while here in North Carolina the Senate’s “Billion Dollar Middle-Class Tax Cut” plan continues to be debated, while the House introduced details of their tax plan this week.
Sadly, most evaluation of the impact of tax changes coming from politicians and the media is embarrassingly sophomoric. Gov. Roy Cooper calls the Senate’s plan “tax giveaways to corporations and the wealthiest,” while a WRAL.com editorial lamented previous tax cuts that have “primarily benefitted large corporations and high income earners.”
But such appraisals are strictly surface deep. Focusing merely on the change in legal liabilities of various taxpayers would earn you an F in any Intro to Economics course worth its salt. What really needs to be evaluated are the harder-to-detect consequences of who truly bears the burden of taxes, and who ultimately enjoys the benefits of tax cuts.
In short, people respond to changes in taxes by altering their behavior. The real question is: Who really is harmed or helped by this change in economic behavior?
Economists refer to the true costs or benefits resulting from this change in economic behavior as the “tax incidence.”
Because income taxes on corporations and high earners seem to be especially vulnerable to intellectually lazy analysis, we’ll focus on those two.
First: Saying that corporate income tax rate cuts benefit only corporations ignores who is truly impacted by the ways corporations will 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 businesses will relocate here from other states to obtain the higher returns to be gained 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.”
Sure, corporations see a more fruitful bottom line when the corporate taxes are cut – at least temporarily. Over time, however, any profit margins higher than the market average will likely be whittled away by the pressure of increased competition brought on by new entrants and transplant corporations.
In the end, benefits of tax cuts to “large corporations” accumulate largely to workers.
Secondly, income tax cuts – in particular those on high earners – have a tax incidence beyond the initial change in the legal tax liability of the “wealthiest.”
In the case of high-income earners, many of them are small-business owners. Moreover, high-income individuals have more options and are thus more mobile than middle- and lower-class income households. The affluent are not stationary targets.
When faced with a stiffer penalty on the earning of more income, their response will be less investment in job creation by small businesses and more high-income individuals moving to another state.
For instance, Maryland’s 2007 millionaire tax drove thousands of high-income people from the state, taking with them all the money they pump into the local economy and destroying jobs held by middle-and lower-income workers.
Cutting income tax rates, including rates on “the wealthiest,” will yield benefits that accrue far beyond those who will see the largest fall in their nominal tax bill.
The bottom line: To paraphrase George Mason University economist Don Boudreaux, evaluating the impact of tax changes by merely looking at the changes in legal tax liabilities of various groups of people is “juvenile.”
Boudreaux clarifies this point with a comparison: How would members of the media respond to the claim that a reduction in press censorship only benefits the media itself?
“But clearly the case for freedom of the press is not centered on the benefits such freedom has for press barons, news reporters, and paid pundits. The core of the case for freedom of the press is that it bestows benefits society-wide. When the press is free, the chief beneficiaries are the general public. Anyone who assesses changes in the press’s freedom exclusively by how such changes affect ‘the press’ would rightly be called out as missing the point.”
In the same way, clamoring about how only corporations and successful people benefit from lower taxes also misses the point. The real beneficiaries of lower taxes are North Carolina workers and the families that depend on them.