Moreover, even if the desired corporate tax revenue can be raised, it will come at a cost. A higher corporate tax tends to result in greater capital outflows, a fall in the domestic ratio of capital to labor, and thus lower real (inflation-adjusted) wages. That is why the conventional wisdom of the economics profession is that, beyond the short term, corporate taxes are implicit taxes on labor. Insofar as they distort investment decisions, they are considered even more damaging than explicit wage taxes. There is ample research suggesting that they should be abolished.
In any case, even if the Biden administration can meet its goals for corporate-tax revenue, it will still come up $2.67 trillion short after 10 years. To address this shortfall, federal personal income taxes on those earning more than $400,000 per year are to be increased. Bearing in mind that those who make $400,000 per year are somewhere between the top 1% and top 2% of all earners, will this raise an additional $267 billion per year?
Federal personal income tax revenues are estimated to be $1.93 trillion for 2021. In 2015, the top 1% earned about 21% of all income and paid about 39% of total income tax revenue; the top 2% earned about 26% of all income and paid about 47% of total income tax revenue. If payment shares are fairly stable over time, the 1% will pay about $773 billion in 2021, and the top 2% will pay about $908 billion. From our rough, back-of-the-envelope calculation, the top 1% would need to pay 35% more to meet the Biden administration’s revenue goal; similarly, tax payments from the top 2% would need to be 29% higher every year for 10 years.
But collecting roughly one-third more in taxes from the affluent on a sustained basis will not be easy. Hitting such an ambitious revenue target most likely will require a broader tax base, rather than just higher taxes on the wealthy. Outside of the U.S., this might be achieved with an increase in the value-added tax (VAT)—a broad-based single-rate indirect tax with few exemptions that is borne by all consumers. Though a VAT-style tax would not serve Biden’s distributional objectives (and may run into constitutional objections), it could at least meet his revenue goal.
For now, however, the current proposals for increases in corporate and personal income taxes are unlikely to fund Biden’s post-pandemic fiscal plans fully. A broadening of the tax base will have to be put on the table.
Willem H. Buiter is Visiting Professor of International and Public Affairs at Columbia University.
Anne C. Sibert is Professor of Economics at Birkbeck, University of London.