Nine Stories to Get You Through Tax Season

A survey found that 65% of Americans support taxing the wealthy, with a big caveat: About a quarter would still support a wealth tax if it resulted in economic decline or more unemployment. “If it’s a straight transfer of wealth, with no effect on the economy, they support it,” explains David Larcker, a professor emeritus of accounting.

The debate over taxes often overlooks the sensitive relationship between taxation and innovation. Charles Jones, a professor of economics, finds that higher tax rates might generate more revenue but could dampen entrepreneurial growth and decrease consumer spending.

The typical method for taxing firms is to calculate their profits, subtract deductions, and then apply a tax rate to what’s left. Benjamin Hébert, an associate professor of finance, argues that taxing corporate payouts would give corporations — especially young ones — more freedom to accumulate and invest in assets.

Finance professor Joshua Rauh analyzed state corporate and individual tax rates over 30 years, observing their respective impacts on different types of businesses. He finds that a 1% increase in a state’s corporate tax rates led companies to reduce their workforces by 0.4%.

For many companies, efforts to minimize tax bills through strategies like income shifting begin even before they go public. “Companies are responding to capital market pressures for tax avoidance,” says Rebecca Lester.

Who bears the brunt of corporate taxes, and is the final distribution fair? In this episode of All Else Equal: Making Better Decisions, former Treasury Secretary Lawrence Summers advocates for retaining the corporate income tax, while finance professor Jonathan Berk argues for taxing equity at the individual level.

The Tax Cuts and Jobs Act of 2017 and the Domestic Production Activities Deduction introduced in 2004 operated on the assumption that corporate tax cuts would inspire businesses to invest in the U.S. economy. But Rebecca Lester finds that this was only true to an extent. Companies getting a better tax deal in other countries didn’t respond to the U.S. tax cuts.

When California raised taxes on top earners in 2012, many dodged the increase by going out of state or reducing their taxable income. This eroded about 45% of the tax hike in its first year. Finance professor Joshua Rauh says the Golden State may be on the “wrong side of the Laffer Curve” — meaning that higher tax rates will result in lower tax revenues.