The Idaho legislative session is now in full swing, and many economic policy proposals are being discussed. It’s not unlikely that economists will disagree about most of them; we aren’t generally known for consensus. Irish playwright George Bernard Shaw once said, “If all economists were laid end to end, they would not reach a conclusion.”
There are, however, some important policy areas where economists strongly agree, and corporate tax policy is a good example.
Idaho House Speaker Scott Bedke is reported to be working on a proposal that would cut the grocery tax credit for some individuals so that the state’s corporate income tax rate could be lowered. The objective of greater corporate investment in the state from such a proposal is consistent with economic theory and historical evidence.
At 7.6 percent, Idaho’s corporate income tax ranks among the highest in the nation. Neighboring states Nevada and Washington have no corporate income tax.
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Economists generally agree that corporate tax reform is needed across the country for the primary reason that these taxes are not entirely paid by the corporations themselves or their shareholders. Corporations generally pass along whatever taxes they may incur in the form of higher prices to consumers and lower employee wages.
Such tax-induced actions affect what is known as tax incidence, or how the burden of the tax is shared. You and I bear the burden of many taxes we actually don’t submit to the government.
Corporate income tax is a business expense like any other that must be offset against revenues if the business is to make a profit. The tax is therefore passed on to consumers in the form of higher prices. Idaho’s corporate income tax is like a hidden sales tax to the consumer.
But consumers are not alone in carrying this tax burden. Research by economists Li Liu and Rosanne Altshuler shows that workers bear most of the burden of the corporate tax. Their empirical study across many industries found that a $1 increase in corporate taxes lowers wages by about 60 cents. This burden results because corporations hire fewer workers and pay less than they would in absence of the tax.
A drop in the corporate tax rate is likely be more effective at increasing investment and hiring than myriad tax incentives being discussed at both the state and local government levels. Policymakers could further agree to lower the overall corporate rate in exchange for eliminating exemptions, thus simplifying the tax code and the costs of complying.
Economists may not agree on much, but lawmakers should be quick to heed the policies on which we do.