These Slides are about my Group presentation to an Economics class on Corporate Tax and How it affects Labor Participation

1. Francis Ogutu
Adriana Padua
Kevin Reuss

2. Hypothesis
 The United States needs to reform the tax code in order to
encourage more capital investments and reduce the tax burden for
workers which lead to a stronger labor force participation.

3. Income Tax
• Introduced 1791(distilled spirits, carriages, refined sugar
• 1817 congress eliminates internal taxes relying on imported good
taxes
• 1862 to support Civil war first Income tax is enacted(fore runner of
modern tax system
• People earning between $ 600 and $10000/year are taxed 3%

4. Brief historical overview
 Additional sales, Exercise taxes and inheritance tax are added
 1862 Office of the Commissioner of Internal Revenue Established
 1866 Revenue collections reached the first high ever of 310 million dollar
 1868, taxes are more focused on tobacco and spirits
 1872 income taxes eliminated as ruled by the supreme court as
unconstitutional(though revived in 1894 and 1895.
 1913, 16th amendment to the constitution makes the Income tax a
permanent fixtures in the Us Tax System applied to both individual and the
corporation.

5.  1918, the first billion revenue collection from the taxes and by 1920, 5.4
billion was collected.
 WWII increased employment and so did tax collection increasing up to 7.3
billion. Withholding tax on wages introduced in 1943, which increased the
number of tax payers to 60 million leading to an increase of 43 billion tax
revenue by 1945
 1981, congress enacted the largest tax cut in US history. Approx. 750
billion over the next six years. This reduction was however, off set by two
tax acts in 1982 and 1984 which decrease tax credits.

6. Tax Reform of 1986 and the Clinton
Administration
 Oct 22, 1986. Pres. Reagan signs into law the Tax Reform Act of 1986 to:
-lower the top tax rate from 50% to 28%
-Eliminate tax preferences to make up for the lost revenues
-Increase business tax rate a corresponding decrease in individual income tax.
 Revenue Reconciliation Act of 1990 was signed into a bill and by which the
emphasis was put on the increase of tax on Wealthy individuals
 August 1993, Clinton Signed another Revenue reconciliation Act of 1993 into law to
reduce approximately 496 billion Federal deficit budget which was anticipated to be
big in the 1994 through 1998
 1997, Clinton signed another act to cut taxes by 152 billion. This would include a cut
in capital gain taxes, per child Tax credit and Incentive to education Tax.

7. Bush Tax Reforms
 2001,Economic and Growth and Tax Relief Reconciliation:
-Save tax payers 1.3 trillion over ten years
-Created new lowest rate,10% for the first several thousand dollars earned
-Established a slow schedule of increamental tax cuts that would eventually double the
child
-tax credit from 500 to 1000
-Adjusted the brackets so that the middle income couples owed the same tax as comparable
singles
Cut the top four tax rates (28% to 25%, 31% to 28%, 36% to 33% and 39.6% to 35%)
 2003, Jobs and Growth Tax Relief and Reconciliation Act
Accelerated the tax cut that had been executed in 2001
temporarily reduced the tax rates on capital gains and dividends to 15%
 In 2004, US was forced to eliminate Corporate Tax provision that had been
ruled illegal by the WTO
 Two tax bills signed in 2005 and 2006 extended through 2010 the favorable
rates on capital gains and dividends which had been enacted in 2003.
raised the exemption levels for Alternative Minimum Tax
Enacted new tax incentives designed to persuade individuals to save more for retirement.

8. Basics of the US Corporate Tax
System

9.  In 2007, a Treasury Department survey found that by one measure, the
average tax rate paid by U.S. corporations from 2000-2005 was 13.4
percent—below the OECD average of 16.1 percent.29
 The contrast between [the United States'] high statutory corporate
income tax rate and low average corporate tax rate implies a relatively
narrow corporate tax base, due to accelerated depreciation
allowances, corporate tax preferences, and tax-planning incentives
created by [the] high statutory rate.‖30
 280 of the largest U.S. corporations paid an average effective tax rate
of 18.5 percent over 2008-2010—just over half of the statutory rate.31
 The largest 100 U.S. companies and 100 largest European Union
companies over the last decade found that the American companies
paid lower income tax rates, on average, than their European

11. Corporate Taxation,
One model shows how tax policy legislation affects capital Capital Formation, and
formation and output.
the Substitution
Elasticity between Labor
The user cost of capital can be written as and Capital
C = (R+δ)(PI/PY)(1-k-u*z) / (1-u)
where user cost of capital is equal to opportunity cost plus
depreciation times the relative price times investment tax
credits minus the rate of income tax times tax depreciation
deductions divided by the rate of income tax.
Income taxes enter the model as an adjustment to the
purchase price. Income taxes also lower the price of output
and perhaps the financial cost of capital if nominal interest
payments are tax deductible.
The price elasticity of the demand for capital is identical,
according to this author, to the substitution elasticity
between labor and capital.

12. Tax Policy in an Era of
Internationalization
• Policymakers reduced statutory
corporate tax rates from about 45% in
1981 to 34% in 1998, eliminated or
reduced investment credits, exemptions
and grants that had significantly lowered
effective corporate tax rates.
• Tax rate cuts and base-broadening were
meant to bolster economic efficiency
and maintain government revenues.
 Despite these cuts in statutory income tax rates, the effective capital tax rate in the typical
developed democracy has actually remained relatively stable.
 Reduced rates retain taxable income that might be shifted through transfer-pricing to low
tax nations while cuts in investment credits and allowances might also sustain revenue
collections.
 Increases in needs and demands for income maintenance, political limits on
retrenchment in social spending, and the consequent specter or reality of rises in public
debt constrain the reductions in capital tax burdens ad even prompt tax increases.
 Low GDP growth, profits and domestic investment, as well as high structural
unemployment, are associated with cuts in capital tax burdens.
 Corporate and personal rates have been reduced and the tax base broadened through
significant shifts away from significant investment credits and allowances in virtually all
countries.

13. Effective Tax Rates are
Correlated with Where
Income is Reported  The weighted average US effective tax
rate on the domestic income of large
corporations with positive domestic
income in 2004 was 25.2%
 About 1/3 of taxpayers had effective rates
of 10% or less and a quarter of the
taxpayers had rates over 50%
 US tax credits had a relatively small effect
on these effective rates
 The US imposes only a residual tax on
foreign income, after providing a credit for
foreign taxes paid on that same income
 A substantial portion of the foreign income
earned by US multinationals is not taxed
until it is repatriated to the US.
 This lead to a tax rate on foreign-source
income of large corporations at around 4%
in 2004.
 The residual US average effective tax rate
on the foreign income of large US
corporations in 2004 was less than 5%

14.  Tax measures which stimulate investment but do not
affect savings will inevitably lead to declines in Tax Policy and
international competitiveness as long as capital is freely
mobile internationally. International
 Investment will be associated with decreases in the
trade balance.
Competitivenes
 These results challenge the commonly expressed view s
that reductions in tax burdens on business will improve
competitiveness by enabling them to undertake more
productivity-enhancing investment
 If capital is not internationally mobile, stimulus to
investment will not lead to capital inflows and therefore
will not be associated with trade-balance deterioration
 Tax policies which raise savings are likely to increase
domestic investment significantly
 Policies directed at investment are unlikely to lead to
permanent increases in investment unless domestic
savings are increased as well
 Given that policies to limit net capital mobility are
frequently pursued, their effects should be analyzed
under the assumption that capital is perfectly mobile.
 Business tax reductions appear to have stimulated a
significant amount of capital formation and to have
drawn capital in from abroad in large quantity

15. Economic Incidence
 Who pays the burden of
Corporate Income Tax
(CIT)?
 Who ends up paying tax
depends on who
receives the benefit of
the tax and it is deeply
intertwined with the
supply and demand of
the market.

16. Producers vs Consumers
If inelastic supply and If elastic supply and
elastic demand: inelastic demand:
burden is on the burden is on consumers
producers

17. Incidence Continued
 Similar elasticities: burden is shared
 Who ends up paying tax depends on who
receives the benefit of the tax and it is deeply
intertwined with the supply and demand of the
market.

18. The Distribution of the Costs to
Producers
 Owners/Capitalists bear a portion of the burden
of the CIT.
 However, workers also bear a portion with a
decrease in wages.
 Capital is more mobile than labor: it can shift
abroad to adjust for rates. The burden higher for
workers when capital is shifted.
 If capital and labor are not substitutes, then a
decrease in capital will result in a surplus in
labor
 If they are substitutes, then labor will increase.

19. Capital vs Labor
 CIT has more impact today as trade
continues to become a larger part of the
economy
 If workers are unable to freely move between
countries then wages will fall
 Gravelle finds than about 60% of corporate
tax is borne by capital and 40% is borne by
labor

20. Effect on Wages
 Aparna Mathur and Kevin Hassett (December 2010)
 Regression controls for other factors that impact wages.
 1% increase in the corporate income tax leads to almost a 0.5-
0.6% decrease in hourly wages.

21. Policy Recommendation:
 Lower the top
corporate income tax
rate.
 Eliminate loopholes.
 Revenue neutral.

22. Revenue Neutral
 Tax rate has little
impact on the
amount of revenue
generated.
 The state of the
economy plays a
much greater role.
 Costs to producers
is shifted to workers
and consumers.

23. The United States Compared to the Rest of the
World
 Reduce the
corporate tax rate
from 35% to 25% in
return for
eliminating the tax
credits and
deductions.

24. Other Changes to the Tax Code
 Improve economic efficiency by
reducing special preferences.
 Provide more neutral treatment of
corporate and non-corporate
businesses.
 Take specific steps to discourage
tax sheltering.
 Reduce the tax code's bias
towards debt financing.
 Reduce the tax code's bias
towards overseas investments.

25. Sources
 Mathur, A and Jensen, M. ―Corporate Tax Burden on Labor: Theory and Empirical Evidence.‖ The American Enterprise Institute. June
2011. http://www.aei.org/files/2011/06/06/Tax-Notes-Mathur-Jensen-June-2011.pdf
 Randolph, William. ―International Burdens of the Corporate Income Tax.‖ Congressional Budget Office. Working Paper Series. August
2006 – 2009. http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf
 Mankiw, Greg. ―Corporate Tax Rates.‖ Greg Mankiew's Blog. May 2006. http://gregmankiw.blogspot.com/2006/05/corporate-tax-
rates.html
 Thompson, Derek. ―Ryan: Corporate Tax Reform Has a Strong Chance in Congress.‖ The Atlantic. October 6, 2011.
http://www.theatlantic.com/business/archive/2011/10/ryan-corporate-tax-reform-has-a-strong-chance-in-congress/246264/
 Pozen, Robert. ―The myth of corporate tax reform.‖ The Washington Post. September 28, 2011.
http://www.washingtonpost.com/opinions/the-myth-of-corporate-tax-reform/2011/09/27/gIQAZine5K_story.html
 Toder, Eric. ―Business Taxation: What are the statutory and effective corporate tax rates?‖ Tax Policy Center.
http://www.taxpolicycenter.org/briefing-book/key-elements/business/statutory.cfm
 United States. 2005. Corporate income tax rates international comparisons. [Washington, D.C.]: Congress of the United States,
Congressional Budget Office. http://purl.access.gpo.gov/GPO/LPS72411.
 Summers, Lawrence H. 1986. Tax policy and international competitiveness. Cambridge, Mass: Harvard Institute of Economic Research.
 United States. 2008. U.S. multinational corporations effective tax rates are correlated with where income is reported : report to the
Committee on Finance, U.S. Senate. [Washington, D.C.]: U.S. Govt. Accountability Office. http://purl.access.gpo.gov/GPO/LPS104947
 Duane Swank (2006). Tax Policy in an Era of Internationalization: Explaining the Spread of Neoliberalism. International Organization, 60
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 Chirinko, Robert S., Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital (April 2002).
CESifo Working Paper Series No. 707. Available at SSRN: http://ssrn.com/abstract=31214
 Marr, Chuck and Brian Highsmith. ―Six Tests For Corporate Tax Reform.‖ Center on Budget and Policy Priorities. February 28, 2011.
http://www.cbpp.org/files/2-28-11tax.pdf
 Veronique de Rugy. ―The Facts About the Corporate Income Tax: Separating economic myths from economic truths.‖ Reason. May 6,
2011. http://reason.com/archives/2011/05/06/the-facts-about-the-corporate
 Lynch, David J. ―Why Corporate Tax Reform is So Tricky.‖ Bloomberg Businessweek. April 7, 2011.
http://www.businessweek.com/magazine/content/11_16/b42240B2361232.htm
 Hanlon, Seth. ―Could Tax Reform Boost Business Investment and Job Creation?‖. Americanprogressaction.org. 17 Nov. 2011. Web. 21
Nov. 2011.
 Annette, Nellen. "Tax Reform in the United States." 29 June 1999. Web. 20 Nov. 2011. http://www.cob.sjsu.edu/facstaff/nellen_a/
 Maffei, Hon. Dan, and Ryan McConaghy. "Case for Corporate Tax Reform." Www.ThirdWay.org. Aug. 2011. Web. Nov. 2011
 Fullerton, Don, and James B. Mack. "Source Taxes." Www.cob.sjsu.edu. Web. Nov. 2011. http/www.nber.org/papers/w 2593 pdf.
 Owen, Evans, and Kenward Lloyd. "Macroeconomic Effects of Tax Reform in the United States." Www.jstor.org. Mar. 1988. Web. Nov.
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