What Elizabeth Warren Doesn’t Get about Taxes

This week, Senator Elizabeth Warren’s 2020 presidential campaign unveiled a radical proposal to levy a minimum 7 percent corporate tax on U.S. companies making more than $100 million annually, with the goal of raising around $1 trillion in new revenue. This comes on the heels of Warren’s proposal to institute a new 2 percent wealth tax on all individual fortunes above $50 million and an additional 1 percent tax on all fortunes above $1 billion with the objective of reducing wealth inequality.

Unfortunately, the higher corporate taxes and wealth taxes Senator Warren advocates are among the most inefficient ways of raising tax revenue without harming the economy.

Corporate taxes have been shown to be significantly less efficient in raising tax revenue than individual income taxes or sales taxes. The ease with which corporations can establish offshore subsidiaries to avoid taxes or engage in tax inversions significantly contributed to the corporate-tax-revenue and capital-investment shortfalls seen in America in recent years. Indeed, many European countries had already recognized the inefficiency of corporate taxation and reduced their corporate-tax rates well before the U.S. did so as part of the Tax Cuts and Jobs Act of 2017.

The significantly positive macroeconomic data reported for 2018, the first year that tax-reform package went into effect, includes 7 percent growth in non-residential fixed investment, 2 percent real-wage growth and 3 percent GDP growth. Academic research shows that this is no coincidence. Several studies of prior corporate-tax reforms have found that lower corporate-tax rates are associated with higher wage growth and higher rates of capital spending on buildings, property, and equipment.

Senator Warren’s 7 percent minimum tax on corporate income would likely reverse these recent positive economic trends and lead to slower growth in investment and wages, in part because it would also disincentivize the automatic expensing of capital equipment. Lower wages, hiring, and investment means less government tax revenue.
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