NCPA - National Center for Policy Analysis

How Taxing the Rich Harms the Middle Class

February 20, 2012

President Obama has continued a campaign for economic fairness throughout his last several major speaking engagements, including the State of the Union and his budget speech.  To this end, the Obama administration seems content to force American corporations to continue to abide by one of the most abusive corporate tax rates in the world, as this is a tax on the "rich," says Aparna Mathurm, a resident scholar at the American Enterprise Institute.

Yet, the corporate income tax has just the opposite effect.  Its burdensome effects are passed in full onto American workers, who pay the true price for the tax.

  • With its 35 percent corporate tax rate, the United States is second only to Japan in the tax burden it places on domestic companies (and Japan plans to reduce its rate later this year).
  • When combined with various corporation taxes at the state level, this tax rate rises to 39 percent.
  • The Obama administration has responded that it is the effective rate, not the statutory, that matters in assessing the burden on American businesses, but it bears mention that even the effective rate is one of the highest in the Organization for Economic Cooperation and Development.

With such a relatively high corporate tax rate, domestic businesses struggle to attract investment and are implicitly encouraged to move activities offshore.  Specifically, studies show that in a world of globally mobile capital, investment will quickly flow to areas that have lower rates of taxation.

Therefore, the high corporate tax rate reduces American business' ability to compete with international market participants, as they fail to attract adequate capital investment.  This reduces the productivity of their workers, and thereby inherently lowers their wages -- a conclusion validated by researchers from Harvard Business School, the Tax Foundation, and the Federal Reserve Bank of Kansas City, among others.

Source: Aparna Mathurm, "How Taxing the Rich Harms the Middle Class," The American, February 15, 2012.

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