As Congress looks for revenue to replace the damaging cuts of sequestration and invest in economic growth during the budget conference, one option lawmakers could consider would be reforming corporate taxes. And negotiations must consider how changes to corporate taxes would impact American families.
Luckily, the Joint Committee on Taxation recently released a report detailing its new methodology for showing how tax changes affect taxpayers at different income levels: from now on JCT will be able to include changes in the corporate tax in these “distributional tables,” whereas before they left the corporate tax completely out of their calculations. Distributional tables allow policymakers to make tax trade-offs with full information about who will gain and who will lose. The JCT’s new approach is important, because the corporate tax is one of the most progressive elements of the federal tax code – increases in corporate taxes fall much more heavily on the wealthy than on any other group – and including the corporate tax in distribution tables will make that clear as Members of Congress decide how much the corporate sector should contribute to our fiscal problems.
Yet in a blog post yesterday on the New York Times Economix blog, Bruce Bartlett claimed that the new data from the JCT shows that raising revenue through a higher corporate tax rate will hurt the poor.
Bartlett points to one table from the JCT report which shows that including the corporate tax in its calculations changes the estimates of the taxes paid by different income classes, and because the numbers are large at the bottom he claims that “much of the burden” of an increase in the corporate tax falls on the poor. But this is a misleading measure of the effect of corporate taxes. Because the very poor pay relatively little in federal taxes, even tiny tax increases look big as a share of taxes paid. And it turns out that these tax changes are, in fact, tiny.
Later in the report, the JCT actually models the impact of a $10 billion per year increase in the corporate tax on taxpayers at different income levels. It finds that an increase in the corporate tax raises much, much more from high-income taxpayers on aggregate than from low-income taxpayers. The results are even more dramatic if you use JCT’s tables to calculate the average tax change per family.
According to my calculations using JCT’s numbers, a $10 billion per year increase in corporate taxes would raise taxes on the average family making $30,000 or less by about $3 per year. By contrast, the same policy would raise an extra $5,635, on average, from people making more than $1 million per year. The reverse is also true: A $10 billion cut in the corporate tax would give a benefit of about $3 per family to the 57 million households living on $30,000 or less, while putting an average of $5,635 in the pocket of the 0.23 percent of households fortunate enough to earn a million dollars a year.
The JCT’s tables demonstrate that corporate tax increases are one of the most progressive revenue sources available. At a time when America’s largest and most profitable corporations are paying lower tax rates than many middle class families while Congress is slashing food aid to the needy, a corporate tax increase that paid for investments in jobs, SNAP, or early childhood education would be great news for low-income families and the economy as a whole.
Kitty Richards is the Associate Director of Tax Policy and Bobby Kogan is an intern at the Center for American Progress Action Fund.