Still more evidence the tax hikes included in the Build Back Better Act would make inflation worse. As noted by Bruce Thompson in the Washington Examiner, a “Working Paper” from the National Bureau of Economic Research shows how tax hikes on businesses result in higher prices for consumers.
The study found that increases in corporate tax rates are passed on to consumers, in part, in the form of higher prices. Here’s the key conclusion from the write-up:
This paper provides evidence that corporate taxes impact retail product prices, and that a significant portion of corporate tax incidence falls on consumers…. The fact that corporate taxes affect product prices, as well as payouts to shareholders and wages, has important implications for tax policy. In particular, models used by policymakers like the CBO and US Treasury may underestimate the incidence of corporate taxes on consumers (CBO, 2018; Cronin et al., 2013).
Exactly how much of a tax hike is passed on to consumers through higher prices?
Informed by our empirical estimate, we can gauge the incidence of corporate taxes on consumers by relating the welfare change of consumers induced by a marginal change in the net-of-tax rate to the sum of the welfare changes of consumers, workers and firm owners (Suárez Serrato and Zidar, 2016; Fuest, Peichl and Siegloch, 2018). We find the incidence on consumers, workers and shareholders is 31%, 38% and 31%, respectively.
While this study focused on C corporations, it does indicate that similar results would apply to S corporations and partnerships. As the authors note, “…we see no price effects for tax rate changes that do not affect the legal entity – neither for C-corporations following personal income tax rate changes nor for S-corporations when corporate income tax rates change.”
Meanwhile, the fact that S corporations pay taxes at individual rather than corporate rates enabled the authors to use S corporations as the test group:
Additionally, we repeat our analysis using a set of firms that are not subject to corporate taxes: S-corporations (Yagan, 2015). S-corporations belong to another legal form of organization and are required to pay personal income taxes rather than corporate income taxes. If our empirical strategy identifying the causal effects of corporate tax changes is valid, we should only find price effects of corporate taxes for C-corporations and not for S-corporations. On the other hand, if changes in state corporate income taxes are correlated with unobserved supply-side shocks, then both C-corporations and S-corporations should be affected. We find positive and significant price effects for C-corporations seeing corporate income tax rate changes. In contrast, we see no price effects for tax rate changes that do not affect the legal entity – neither for C-corporations following personal income tax rate changes nor for S-corporations when corporate income tax rates change.
One key finding from the study is that low-income households are hardest hit:
We find that the lowest price goods tend to respond most to corporate tax changes, with average magnitudes almost twice as high in the lower half relative to the upper half. Similarly, we find evidence of a larger effect for UPCs commonly purchased by households with lower incomes relative to those purchased by high-income households
An interesting result from the study is the effect debt plays in corporate tax burdens and, therefore, their responsiveness to tax changes. As noted elsewhere, more highly leveraged firms pay lower effective tax rates. Would these lower rates reduce the amount of a new tax that is passed on to consumers? Apparently, yes:
US tax law makes interest rate payments on debt deductible for corporations. Thus a natural implication is that firms with higher levels of debt can benefit from tax shields, making them less sensitive to changes in corporate tax rates. Table 8 provides evidence that this is indeed the case. We merged our sample by company name with Compustat to obtain information on leverage, which resulted in a reduced sample. The table interacts corporate tax rates with an indicator of whether a firm is above or below the median debt ratio in the sample (0.24). We find that the effects tend to materialize on firms with lower levels of leverage. For firms with higher leverage, which can take larger debt tax shields, we see no statistically significant effect of changes in corporate tax rates on product prices.
This finding is consistent with S-CORP’s experience, where members with significant deductions and relatively low tax burdens are less concerned about public policy changes than those who are more exposed.
What’s the bottom line? More evidence the House-passed BBB would raise prices on consumers and make inflation worse, with low-income Americans being the hardest hit. The tax hikes in the BBB are large and almost exclusively shouldered by businesses, both corporate and pass-throughs, so one might expect the price effect to be significant. Opponents of the BBB have been right for over a year now. Its time to put the BBB to rest.