Corporate Tax Cuts And Its Effect On Income Inequality

Author: Thebe Matlhaku

The idea behind corporate tax cuts and its effect on income inequality has been a matter on contention for many decades. The tug of war in terms of policy lies in the intended beneficiaries of a corporate tax rate decrease. According to Nallareddy, Rouen and Serratto (2018), the proponents of a progressive tax reform ratified by Donald Trump by reducing the United States corporate tax rate from 31% to 21.5%, were of the view that salaries and wages of American employees would increase by 4000 USD (CEA, 2017). 

Estimating the relationship between corporate tax rates and inequality poses a challenge as the impact of corporate tax changes is dependent upon investment decisions, factor reallocation and how robust the labour market is (Nallareddy, Rouen and Serratto, 2018).  (Putterman, 2018) argues that the decrease in corporate tax in the United States will account to a 21.5% increase in the value of the stock market.

 To explain, a decrease in corporate tax, leads to an increase in profits, an increase in wages and an overall investment in the stock market. Whilst this is all well and good, there is one catch… The inequitable distribution of the additional profits adversely affects income and overall inequality (Putterman, 2018).

According to the Oxfam Inequality Report (2019) the decrease in corporate tax is the single biggest deterrent to economic equality. Furthermore, a reduction in corporate tax reduces the amount of state funds required to provide basic services such as quality education and healthcare. American Venture Capitalist Nick Hanauer argues that it is nonsensical that corporate tax rates have decreased over time. In fact, he asserts that the poor and the middle class ( the engine of economic growth) will one day carry their pitchforks and scale the high walls where the rich continue to hide themselves  to claim what is rightfully theirs.

(Zucman, 2015) asserts that taxes on wealth are almost nonexistent. Only 4 cents of every American dollar of tax revenue is from taxes on wealth. In affluent countries, the mean top rate of personal income tax plummeted from 62% in the 70’s to 38% in 2013. In impoverished nations, the mean top rate of personal income tax is 28%.  In countries such as Brazil and the United Kingdom, the poorest 10% are now reserving a larger portion of their income on taxation than the richest 10%.

Governments all over the world need to establish a set plan to receive more tax revenue from the rich in order to fight unsustainable levels of inequality (Oxfam Inequality Report, 2019). For example convincing the rich to pay half a % extra tax on their wealth might raise enough money to educate 262 000 000 children and provide healthcare for 3 300 000 more.

Whilst this all sounds fantastic, detractors of a regressive tax reform can argue that a corporate tax hike is really not the solution when the state is inherently corrupt in its nature. Bringing it closer to home, South Africa is the quintessential example of a state that is critical but stable. South Africa is marred by greedy politicians, abject levels of poverty and inequality and ranks very high on the world corruption index.

Now you tell me, should we still propose an increase in corporate tax given the corrupt nature of the South African government?

References

Nallareddy, S., Rouen, E. & Serratto, J.C.S. 2018. Do Corporate Tax Cuts Increase Income Inequality? NBER Working Papers 24598, National Bureau of Economic Research, Inc.

Oxfam Inequality Report. 2019. Public Good or Private Wealth?

Putterman , L. 2018. Basic Math Shows How The Corporate Tax Cut Gives a Quantum Boost to Inequality. [blog]  Available at: http://evonomics.com/basic-math-shows-corporate-tax-cut-gives-quantum-boost-inequality/

Nowhere to run: South African tax payers and the Common Reporting Standard. Biznews. [blog]  Available at: https://www.biznews.com/global-citizen/2017/05/22/sa-tax-payers-common-reporting-standard

Author: Thebe Matlhaku

Leave a Reply