The FT issued an email last night saying:
Steven Mnuchin warns of market fall without tax cuts.
The US Treasury secretary warned Congress that US stock markets will shed a “significant amount” of their recent gains if lawmakers do not pass tax reform.
On the eve of a critical Senate vote aimed at pushing tax-cutting plans forward, Mr Mnuchin told Politico in a podcast that there was “no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform”. US equities would “go up higher” if the reform plans, which include a reduction in the corporate tax rate, were passed.
This is interesting for three reasons. First, it says quite explicitly that the proposed tax reforms are meant to cut the tax rates of big business. Second, it quite clearly states that the corporate tax rate changes share prices, in this case by driving them sharply upward. And third, as a result it states quite clearly that the US Treasury thinks the incidence of corporation tax is on shareholders, who are already capitalising the value of the gains they are to be given.
But in fact we already knew the US Treasury thought this last point, which Mnuchin says the evidence now supports. We know it because as, Paul Krugman has noted this month that there is:
[T]he tale of the Mnuchin Treasury’s incompetent attempt to suppress an internal analysis — to send it down the mnemory hole? – on the incidence of corporate taxation. This paper reached the inconvenient conclusion that most of the tax stays where it’s applied — with the owners of corporate capital — with only a small share falling indirectly on workers. In general, attempts to suppress stuff like this fail thanks to leaks. But in this case the paper has already been published in a peer-reviewed journal, so that even if the Treasury were locked down tight everyone could read it anyway.
Mnuchin wanted, then, it to be thought that incidence does not fall on shareholders even though that Treasury report said that only 18% fell on labour, but has now, with typical Trump team competence, confirmed that it really does fall on capital, and that they'd better appreciate the fact if they want to keep the advantages of it doing so.
The FT considered this further recently in a piece on 'The vain promise of tax cuts'. As was said there by FT journalist Martin Sandbu:
Tax levels, and corporate taxes in particular, have been on a downward trend in most countries, and the argument is always the same: this will stimulate economic activity and growth. So it’s important to listen to Dietz Vollrath, who shows hard evidence that tax cuts do little to boost growth (and higher taxes do little to stymie it). So compelling is this evidence, in fact, that it is more productive to discuss why tax levels don’t effect growth much.
He adds (and I think correctly):
Why do tax levels seem to do little to change growth one way or the other? Essentially because labour supply – the amount of hours or effort workers decide to put in – is not very sensitive to their take-home pay. Similarly for capital: new investment does not respond much to dividend taxes. In the jargon, the elasticities of labour or capital supply with respect to tax rates seem close to zero.
Or as Vollrath more picturesquely puts it: “There is not some pent-up store of workers and human capital out there that is just a 35 per cent tax bracket away from getting off their ass and going to work.”
Quite so. Or as Krugman would put it, in an alternative explanation:
A lot of corporate profits aren’t a return to capital: they’re rents on monopoly power, brand value, technological advantages, and so on. Inflows of capital won’t compete those profits away, so the international capital market isn’t relevant to the incidence of taxes on those profits.
So in other words, those seeking to explore a shift in returns between profit (the return to enterprise) and wages (the return to labour) as a result of changes in corporation tax rates are missing the point as in the large companies where measurement can be made the return being taxed is rent, which is largely unrelated in economic terms to profit and wages and is instead the return, in this case, to market rigging.
And the reality is that Mnuchin is, of course, delivering an increase in that rent. The whole process of using a fraudulent election claim - that all Americans would get a tax cut - to deliver the reality that most will get an increase and the best off and the companies that they own will get a substantial fall is a perfect example of rent seeking behaviour arising from corporate capture of the democratic process of government.
But let's stop debate on who benefits: Mnuchin has stated what we all already knew, which is that this is for the undisputed benefit of the owners of capital on whom almost all the incidence of corporation tax indisputably falls. That debate is, I think, now closed.