The root cause of the drastic drop in tax rates for very wealthy Americans over the past 75 years is not what many people would guess. It’s not about lowering income taxes (although they certainly play a role), or lowering inheritance taxes (although they do matter too).
The biggest tax benefit for the rich has been the sharp drop in the corporate tax rate.
In the 1950s, 1960s and 1970s, many companies paid about half of their profits to the federal government. The money helped pay for the U.S. military and investments in roads, bridges, schools, scientific research, and more. “A dirty little secret,” Richard Clarida, an economist who is now vice chairman of the Federal Reserve, said once, “Is that corporate income tax used to generate a fair amount of income.”
Since the mid-twentieth century, however, politicians from both political parties have supported cuts in the corporate tax rate, often under intense lobbying from US businesses. The cuts have been so big – including during President Donald Trump’s 2017 tax overhaul – that at least 55 large companies paid no federal income tax last year, according to the Institute on Taxation and Economic Policy. Among them: Archer-Daniels-Midland, Booz Allen Hamilton, FedEx, HP, Interpublic, Nike and Xcel Energy.
“Right now, the United States collects less corporate tax revenue as a percentage of economic output than almost any other advanced economy,” Alan Rappeport and Jim Tankersley of The Times write.
The rationale for tax cuts has often been that the economy as a whole will benefit – that a lower corporate tax would lead to business expansions, more jobs and higher incomes. But it didn’t work that way. Instead, economic growth has been poor since the 1970s. And incomes have grown even more slowly than the economy for all groups except the rich.
The US economy does not perform well when tax rates for the rich are low and inequality is high.
Corporate taxes are taxes on wealth
Corporate taxes are such a large part of the overall taxes paid by the rich, as a large portion of their holdings are usually stocks. And as business owners, they do pay corporate taxes. Most of their income does not come from a salary or a bonus; it comes from the return on their wealth.
“In fact, the only tax that matters to these billionaires is the corporate tax they pay through their business.” Gabriel Zucman, an economist and tax specialist at the University of California at Berkeley told me. “The main reason the American tax system was so progressive before the 1980s is because of the heavy taxes on corporate profits.”
President Biden is now trying to reverse some (but not all) of the corporate tax cut. His plan raise the corporate tax rate, punish companies that move profits overseas, and introduce a rule designed to prevent companies from paying taxes, among other things. The money would help pay for his infrastructure plan. “It’s honest, it’s fair, it’s financially responsible and it pays for what we need,” Biden said yesterday at the White House.
But some of the criticism is quite clearly inconsistent with the facts: The long-term corporate tax cut doesn’t seem to have brought much benefit to most American families.
For more: If you haven’t yet listened to yesterday’s episode of “The Daily” – in which Jesse Drucker explains how Bristol Myers Squibb avoided taxes – I recommand it.
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“Love is a slippery and intangible thing,” writes novelist Celeste Ng in an essay for The Times.
He is captured in moments that are both vivid and ordinary: parents drive an hour and a half to visit children and restock their refrigerators; a young couple on a motorbike at night; a sleeping child surrounded by toy dinosaurs.
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PLAY, WATCH, EAT
What to cook
In the garden
Make friends with mushrooms, both the type you plant and the ones that seem to appear on their own.
What to read
“First Person Singular”, Haruki Murakami’s new collection of stories, allows “the author’s own voice – or what sounds like his own voice, wonderfully translated by Philip Gabriel – to enter the narratives,” David Means written in a review.
Late at night
Late night hosts have spoken Representative Matt Gaetz.
Now is the time to play
Thanks for spending part of your morning with The Times. See you tomorrow. – David
PS New York City changed the name from Longacre Square to Times Square, in honor of the New York Times relocating to the area 117 years ago today. A Times story shamelessly – but correctly – predicted that the new name was “not likely to be forgotten”.
You can see cover page printed of the day here.
Lalena Fisher, Ian Prasad Philbrick, Tom Wright-Piersanti and Sanam Yar contributed to The Morning. You can join the team at firstname.lastname@example.org.