Elizabeth Warren and her fellow leftists love corporate taxation because they see it as a means of income redistribution from wealthy investors to workers, so as to narrow the income and wealth gap. However, the leftists are utterly mistaken, as taxing corporate income doesn’t benefit but hurts workers while discouraging investment. Such a mistaken belief is based on these leftists’ failure to observe facts and to integrate knowledge about the requirements of human flourishing.
In a recent Wall Street Journal online column, James Freeman argues that leftist like Senator Warren should love Donald Trump’s new corporate income tax cut from 35% to 15% because it is a big win for workers. However, the ideological lenses of the leftists prevents them from seeing this connection, as they dogmatically view corporations (their shareholders) as the ‘fat cats’ that must be taxed more so as to reduce income inequality and to benefit workers.
Freeman reports that research shows the effect of corporate income taxes being the opposite of what the leftists believe. A study on international corporate tax rates and manufacturing wages in 72 countries over 22 years showed that the corporate taxes are paid mostly by workers.
Should the defenders of high corporate taxes throw away their ideological dogma and observe and integrate the economic knowledge research has uncovered, they would understand the benefit of cutting (and eventually, eliminating) corporate taxes.
As Freeman explains the research by economists, the basic requirement of higher wages is increased worker productivity. The only way to significantly increase productivity is to provide workers better tools. Invention and adoption of better tools and equipment, from hand tools to power tools to industrial robots, have always led to increased production of goods and services in a given time period—and higher wages.
But tools and equipment require investment, which is attracted by low corporate tax rates. The high economic growth in several countries in Asia (such as Singapore, Hong Kong, Macau, Taiwan) as well as Ireland is in a large part due to their low corporate taxes that bring in investment.
A study by Kenneth McKenzie and Ergete Federe, my colleagues at the University of Calgary, confirms these research findings with data from Canada. They found that every additional $1 of corporate income tax revenue decreased the aggregate wages between $1.52 (in Alberta) and $3.85 (in Prince Edward Island). According to their calculations, the recent 2 per cent increase in the corporate income tax rate in my home province Alberta reduces the annual aggregate labour earnings here by $1.12 billion, or by $830 per household.
The failure to grasp such facts confirmed by research and to understand their implications is based on willful evasion and consequent inability to integrate these facts with knowledge about the requirements of human survival and flourishing.
Leftists such as Elizabeth Warren cling to a non-factual, adversarial view of human relationships as a zero-sum game. Should they choose to look at facts and integrate them instead, they would discover that human interaction can be a win-win situation, in the right conditions that maximize the possibilities for flourishing for everyone.
Such conditions for flourishing are: freedom and the lack of initiation of physical force (including fraud). When investors are free to invest wherever they want, undeterred by government initiating physical force through corporate taxes, everyone benefits. Investment creates more job opportunities, more innovation, higher productivity, and higher wages, but also lower production costs and lower prices, which benefit consumers.
While Elizabeth Warren is unlikely to give up her ideology and look at the facts, the rest of us can observe reality and understand the implications of taxation.
If we want more prosperity and flourishing for all, we should advocate and cheer every tax cut everywhere, as they enhance our freedom to choose how to spend the money we make. Corporate income taxes in particular should be reduced (and eliminated), as they have an especially detrimental effect on flourishing by deterring investment and lowering wages.