It’s been a month of celebration from the Left since President Biden’s signing of the curiously named “Inflation Reduction Act.” In case their ruckus over the bill’s progressive spending spree drowned out more considered voices, let this be clear: the act is bad news for American companies and workers.
Critics have pointed out the 87,000 new IRS agents and the $369 billion in handouts under the guise of “climate action,” but more attention should be paid to the 15% minimum corporate income tax the act levies on businesses over $1 billion — a provision which only adds to the red tape that American companies have to cut through. There’s also a new 1% tax on stock buybacks (a recent Democratic boogeyman) that will limit companies’ ability to make decisions for themselves. These were presented as only affecting the ultra-wealthy, but the truth is far more complicated.
Increasing corporate taxes will hamper economic growth by reducing companies’ capital investment and ability to develop innovative products and services. Further, as fundamentally regressive taxes, they conflict with some of the professed core goals of the Democratic Party. As such, Biden and Congress’s choice to levy these taxes anyway shows that given a tradeoff between economic equity and funding for the state, the party’s true preferences aren’t so altruistic.
Corporate taxes are just another layer of sales and personal income taxes. Nevertheless, they represent a politically palatable means of raising taxes across the board, laundered for economically unaware voters through clichés about “asking” large corporations “to pay their fair share.” This characterization of corporate tax ignores that corporations are fundamentally associations of individuals — workers and shareholders — who seek economic benefits through the investment of their labor or capital. Any tax levied on “corporations” is ultimately paid by individuals.
Despite Democrats’ rhetoric about making the wealthy pay, corporate taxes are regressive, passing costs primarily to workers and consumers. A 2020 study from the National Bureau of Economic Research explored the typical tax incidence of U.S. corporate taxes — that is, which people really foot the bill when businesses are taxed. It found that shareholders — the presumptive “wealthy” targets of the policy — only pay 31% of the ultimate tax burden, with 31% transferred to consumers and 38% to wage-earning workers.
For consumers, these taxes manifest themselves in inflated prices: the study estimates that retail prices increase by 0.17% for every 1% increase in the corporate tax. This burdens lower earners, who spend a higher percentage of their income on basic goods than the wealthy do. For workers, this means a reduction in wages or slower wage growth, which is not in keeping with the spirit of Biden’s claim that “no one earning less than $400,000 a year will pay a penny more federal tax.” Everyone will pay, one way or another.
Even with these failures, that must mean at least the 31% tax incidence on shareholders meets the Democrats’ stated aim of taxing the ultra-wealthy — right? Not quite. Shareholders are often characterized as wealthy board members, or as huge asset managers like Vanguard and BlackRock. But in 2022, 58% of American adults reported owning stocks. Further, the Federal Reserve’s Board of Governors found that 75% of non-retired adult Americans have retirement savings — 401(k)s, IRAs, pensions, taxable accounts, etc.—and most of these people participate in the stock market to some extent.
Ironically, by focusing on businesses with over $1 billion, the Inflation Reduction Act’s minimum corporate tax will affect the large-cap stocks that retirement accounts are most exposed to, reducing the return that American workers get on their nest eggs. The same holds true for the 1% tax on stock buybacks, which could potentially limit companies’ abilities to make capital allocation decisions and depress stock prices, trickling down to retirement savers. While the Biden administration acts like these taxes take only from robber barons, it’s actually punishing the vast majority of Americans who’ve planned ahead for retirement.
Despite all the evidence to the contrary, some argue that profits will never be taxed if we don’t take them through a corporate income tax. This is untrue in the long run. Because the point of a corporation is to make money for those connected to it, its profits will eventually be paid out to wage-earners and shareholders, invested to make more money to pay out to wage-earners and shareholders, or used to pay off company debt. Taxing profits is simply double taxation as long as a personal income tax exists. The last thing Americans need in a time of rampant inflation is to pay more to line the government’s coffers.
Workers already face regressive taxation — Social Security and Medicare taxes, for example — while also bearing the burdens of overregulation. This new chunk taken out of individuals’ pocketbooks, compounded by further barriers to entry for businesses, portends worse economic outcomes for middle-class Americans and reveals the Democratic Party’s true priorities.
