ACT Tax Facts: Tax Reform Would Create New Opportunities and Growth for American Workers
As leaders in Washington discuss the merits of corporate tax reform proposals to help boost American business, the impact of our current tax code on American workers rarely takes center stage in the tax reform debate. However, leading economists and tax reform experts from both sides of the aisle have weighed in on this issue, and their analysis is clear: America's complex and outdated tax code is hurting American workers in the global economy and tax reform would create new opportunities and growth for workers here at home.
To examine the impact our tax policies have on American workers, it's critical to recognize that American multinational companies are some of our nation's leading employers and contribute significantly to U.S. economic growth. The Business Roundtable found:
"In 2011, globally engaged U.S. companies directly employed 22.9 million American workers, including both full-time and part-time jobs. These companies paid out $1.7 trillion in labor income and directly contributed $3.0 trillion to U.S. gross domestic product ("GDP"). Including direct, indirect, and induced impacts, globally engaged U.S. companies supported 71.2 million jobs, $4.1 trillion in labor income (including wages and salaries and benefits as well as proprietors' income), and $6.9 trillion in GDP."
The reality is these workers share the burden of the corporate income tax. A 2013 report from the Congressional Joint Committee on Taxation (JCT) highlighted this issue, stating that the existing research has two points of consensus:
"One is that the burden of the corporate income tax falls largely on domestic individuals, and therefore the corporate income tax does impact the well-being of these individuals. The second is that the burden of corporate income taxes is not borne entirely by capital owners, and is instead shared between capital owners and labor with the share borne by each being the subject of ongoing debate."
The JCT also made important changes to their income distribution methodology to reflect this dynamic. Its methodology is now in line with the US Treasury Department and the Congressional Budget Office. The Treasury department concludes that 18% of the corporate income tax is borne by labor, while the CBO believes that 25% of the corporate income tax burden falls on workers.
Bruce Bartlett, an economic policy advisor under Presidents Reagan and George H.W. Bush, notes that workers pay for the corporate tax through lower wages, in a New York Times op-ed from October 2013:
"While economists still believe that the bulk of corporate income taxes is paid by the owners of capital, in recent years they have come to believe that workers ultimately pay much of the tax in the form of lower wages. This results from lower capital investment due to a higher cost of capital, which reduces productivity and hence wages, and because capital investment moves to other countries where corporate income taxes are lower."
Economist Dr. Laura Tyson, the former Chair of the Council of Economic Advisers under President Clinton, also highlighted this dynamic during a panel discussion hosted by the American Enterprise Institute in February, saying:
"Who bears the burden of the corporate tax? [A] significant and rising share of the corporate tax burden in the U.S. is borne by U.S. workers."
Clearly the issue of corporate tax reform is critical to Americans, who bear the corporate tax burden both as workers and savers, and is heightened by the fact that American companies face the highest corporate tax rate in the developed world at more than 39%.
Reforming our nation's corporate tax code will create jobs and growth opportunities for American workers including increased wages, salaries and better benefits. A recent Berkeley Research Group study, led by ACT economic advisor Dr. Laura Tyson, shows that a modern, hybrid international tax system would create millions of American jobs here at home by increasing the amount of foreign earnings that are brought back to invest in the United States. The Berkeley Research Group report found that this new spending would increase U.S. GDP by $208 billion or more and create at least 1.46 million new jobs.
A study by Rice University economists of Chairman Camp's tax reform discussion draft had similar findings, noting that comprehensive tax reform would lead to wage increases:
"Boost after-tax wages for American workers by 2.3 percent two years after enactment, by 3.8 percent after 10 years, and by 6.1 percent over the long term."
When American businesses succeed abroad, it creates more opportunities for American workers across the country. Today our tax system is making it harder for American businesses to compete with businesses from other countries. Our tax system should make American businesses more competitive, which would directly benefit American workers. A report by Harvard Business School professors Mihir Desai and C. Fritz Foley and University of Michigan professor James Hines looked at the impact U.S. multinational corporations' foreign activities have on their activity in the U.S. The report found that in fact the corporation's domestic and foreign activities are complementary.
Boston University economics professor Laurence J. Kotlifkoff summed the issue up best in a 2014 New York Times op-ed, saying:
"Our corporate income tax is economically self-defeating hurting workers, not capitalists, and collecting precious little revenue to boot."
Given the broad support from both sides of the aisle for corporate tax reform that helps American workers, now is the time to reform our tax code by lowering the corporate rate, ending tax breaks and preferences, and creating a modern, international tax system so American businesses can compete, grow and hire workers.
