Corporate-tax component stymies bill that would help businesses

The $3.5 trillion budget proposal moving through Congress would do much to strengthen America's safety net. For instance, it would make child care more affordable for low- and middle-income families, while creating a pathway to universal early childhood programing. It would also support the earnings of low- and middle-income workers by continuing enhanced Earned Income Tax Credit benefits initially created under various pandemic relief packages.

The budget proposal would also make health care more affordable by, among other things, reducing prescription drug prices, extending insurance premium subsidies created under the Affordable Care Act, and initiating a new program to provide health coverage to approximately two million uninsured Americans. Oh, and it would directly aid businesses by allocating federal funds to help cover family leave costs. But that isn't the only way businesses gain under this "liberal" proposal.

In fact, most of the social benefit programs the proposal funds help businesses in a variety of ways, from enabling more parents - particularly women - to enter the workforce, to subsidizing the earnings of low- to moderate-income workers, and thereby taking pressure off potential wage increases employers would have to pay. It would also give folks more money to spend on consumer purchases, driving up corporate profits.

Which is why business groups have historically supported the social programs the proposed budget would fund. Yet, despite containing many initiatives businesses support and would benefit from, corporate lobbyists are opposing the budget.

Why? The answer is simple: to cover some of the $3.5 trillion in spending, Congress is considering increasing the corporate income tax rate to either 28 or 26.5 percent, from its current rate of 21 percent. That tax increase is the reason corporate America is opposing a budget that otherwise helps business.

Jay Timmons, CEO of the National Association of Manufacturers, lamented that this tax increase would take America "back to where we were" before the 2017 business tax cuts that passed during Trump's Administration. Which is neither accurate, nor as it turns out, a bad place for businesses to be.

It's not accurate, because the corporate income tax rate was 35 percent before Trump's tax cuts passed, still well above the levels being proposed to help pay for new federal spending. And back in those pre-Trump tax cut days, businesses were doing quite well from a profitability standpoint. How well? According to BEA data, aggregate, after-tax corporate profits in 2017 stood at $1.87 trillion.

For context, that profitability figure is 873 percent greater than 1981, when President Reagan first implemented supply-side tax cuts for businesses (and wealthy individuals). Recall that under supply-side theory, tax increases always harm the economy, while tax cuts for corporations and wealthy individuals are always supposed to grow it at such a fast pace, huge benefits trickle-down to everyday folks. But things haven't gone the way supply-siders promised.

Indeed, from the time supply-side tax cuts were first implemented in 1981 through the enactment of Trump's tax cuts in 2017, growth in corporate profits vastly outpaced growth in both the nation's GDP - which was around 165 percent, and in wages for the bottom 90 percent of income earners - which was around 40 percent.

Going all-in on supply-side, Neil Bradley of the U.S. Chamber of Commerce, used the flip side of the theory, that all tax increases impede economic growth, when he cautioned the proposed tax increase would be "economically devastating for the country."

No, it won't. Truth is the data have never supported either central tenet of supply-side: that tax cuts always stimulate the economy or that tax increases always harm it.

To the contrary, every credible, independent study of supply-side done to date, whether by the London School of Economics, the IMF or the Congressional Research Service, has found cutting or raising tax rates on corporations - or wealthy individuals for that matter - is simply not correlated with economic growth. Investing in human capital, however, does generate increased economic activity that benefits everyone - including businesses.

• Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.