WASHINGTON — Earlier this week, I testified in front of the Joint Economic Committee on the topic of assessing the recovery after five years.
As you can imagine, congressional testimony can be pretty frustrating these days for members of the fact-based community, but I thought this one covered a lot of useful ground with substantive disagreements as to the way forward. One exception, however, was the part of the discussion that veered into the fantasy that you could help the recovery reach more people by cutting the corporate tax rate.
Let me be quite clear that our corporate code is a mess, fraught with loopholes and incentives to engage in deep tax avoidance, which is precisely what many firms do — at least the ones who can afford it, like GE, which employs 975 tax avoiders analysts. I’m a big advocate of cleaning out the code, and am even willing to join the general consensus to achieve revenue-neutral reform through broadening the base and lowering the rate.
But don’t kid yourself, as too many members of the congressional panel seemed to do, that lowering the marginal rate on corporate taxation would somehow help the middle class.
There are two ways that lowering taxes on business-generated income — from interest, dividends and capital gains — could reach the middle class on down. First, through trickle-down: Cut taxes on the holders of corporate income, and you’ll allegedly trigger large, positive responses in investment, jobs and higher pay for wage earners. It’s a pleasing story, but one that’s been largely debunked by both research and history.
Second, if the corporate income sources noted above reached lower-income groups, then cutting corporate taxes would directly lower their tax liabilities and raise their disposable incomes, a view that seemed to be held by some members of the congressional panel.