Corporate Tax Cuts Worsen Income Inequalities

Category : Politics/Government
Posted By : Ambrose Onyango
Posted Date : 02 Jan 2019 10:16 hrs

Tax-cutsMany governments around the world, and especially in Africa, always argue that implementing corporate tax cuts will stimulate investment and cause the income of lower income earners to rise. However, the reality is that corporate tax cuts worsen income inequalities between the highest earning percentiles in society and the majority of the population.

These observations were made during recent research done in the US to establish whether the tax cuts passed into law by the Trump administration would result in those cuts trickling down in the form of higher incomes for workers.

Sadly, the study found that the corporate tax cuts resulted in immediate benefits for the higher income households that constituted less than 1 percent of the population, but not the average employee. Of greater concern is the fact that this disparity has been worsening over time.

For example, the researchers found that by 1980, about 10 percent of incomes went to the top 1 percent of the population, while the fraction going to this group doubled to almost 20 percent by 2010.

Furthermore, that top 1 percent of the population also revealed marked variations in the rate at which their incomes grew over the period studied by the researchers. Actually, it was found that the cream of the cream (the highest income earners in that top 1 percent) registered higher rates in the growth of their income when compared to the least earners in that top percentile. 

A clear illustration of this rapid growth was the finding that the top 0.01 percent of the highest income earners in the country saw their earnings triple during the time when the rest in the top 1 percent group had their earnings grow by 100 percent. 

The research concluded that only 12.4 percent of the growth in the income of employees during the 30 years under review could be attributed to the corporate tax cuts implemented during that period.

As already indicated, the benefits of state income tax cuts are immediate for the top earners in that jurisdiction. For example, each 1 percent tax cut causes the income of the top 10 percent of the highest earners in society to increase by at least 0.67 percent.

About 87 percent of the increase in income goes to just 1 percent of the highest earners, while 34 percent of those income gains go to the top 0.01 percent privileged category of the top 10 percent. This goes to show that corporate tax cuts worsen income inequalities even within the top earners in the community.

A Practical Illustration of Unequal Distribution of Tax Reduction Benefits

The researchers used a hypothetical example to highlight how this income inequality plays out in the real world once a corporate tax cut is implemented by a state. Assume that a given corporate tax cut amounts to $1 million that the top ten percent of the highest earners have to share among themselves. Furthermore, assume that there are exactly 100, 000 individuals or households in that group of the top 10 percent highest income earners.

Using those assumptions, the top 0.01 percent of those 100,000 individuals will each get a boost of $3,400 in income while the researchers found that the other members of the top 10 percent will get just $1.44 from the $1 million available to the entire 10 percent to share.

Unfortunately, the rest of the working population that constitutes the remaining 90 percent will not get anything from that $1 million, at least not in the immediate aftermath of the tax cut implementation.

The researchers then looked at what happens to two groups of the top income earners after corporate tax cuts have been made. First, they looked at what happens to those who earn more than $200,000 annually (this is the highest earning group tracked by Internal Revenue Services, IRS). For this group, an increase of 3.5 percent in gross annual income is realized when tax cuts take effect.

Conversely, no significant increase is observed in the gross annual income of individuals who earn less than $200,000 each year. This disparity means that those at the top get wealthier, at least in terms of their annual earnings, while those lower down stagnate or deteriorate.

In short, the business owners are given priority when corporate tax cuts are planned while the working population is treated like an afterthought, at least in terms of how soon they can expect to reap any gains from the tax measures instituted.

Changes in the Labels Given to Income

Interestingly, the wealthy have another way to consolidate their position at the top of the income food chain. For example, these high income earners know that the state will take a bigger cut from their earnings in the form of income taxes. So, what do they do to shield their overflowing income from the taxman?

They convert that money into capital for business because the taxes there are lower than the taxes on earned income. This shift more than restores what they lost when they took a cut in pay in order to invest the other money as a ploy to shield it from the “outrageous” tax rates of earned incomes, such as salaries.

What Happens During Recessions?

Economic downturns and recessions usually hit the top earners the most since most of their wealth is in the form of investments. The rapid drop in income witnessed during a recession means that a lot of the wealth of high income earners is wiped out quickly.

Conversely, the low income earners aren’t affected as much, unless they lose their jobs as companies conduct mass layoffs in order to stay afloat during those hard economic times.

What Lessons Can African Governments Take Away?

Corporate tax cuts will not on their own generate broad-based economic development in the country. Instead, the privileged high earners will get much more income while the average citizen will struggle to make ends meet.

Nevertheless, government subsidies and other direct investments by the state can help to level off the widening income inequalities by making the life of the average worker more comfortable.

Thus, a general improvement in the lives of the majority within the jurisdiction or state will do more to cause a spurt in the growth of investment since the investors will be sure that their products have a market waiting for them. The biggest takeaway from decades of special treatment of the corporate world is that corporate tax cuts worsen income inequalities and governments shouldn’t continue offering them if they want to develop their populations in a sustainable way.

By Ambrose O. for Ezega Blogs

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