‘Will lowering the corporate tax rate jump-start the economy?’ NO YES
The marginal tax rate on corporate profits in the United States is 35 percent. As President Donald Trump and other proponents of tax reform continually say, this is the highest rate in the world. This is true — but also incredibly misleading.
Due to loopholes, the actual tax rate on corporate profits is close to 20 percent, putting the U. S. right around the middle among wealthy countries.
This numbers- versus- reality gap should be kept front- and- center in the debate over reforming the corporate income tax. If someone argues that U. S. corporations pay too much in taxes, they are not being honest.
Corporations in countries like Germany and the Netherlands pay a comparable share of their profits in taxes. High taxes are not putting our firms at a competitive disadvantage.
Furthermore, as a matter of simple arithmetic, if our corporations pay less in taxes, the rest of us will have to pay more.
Yes, Republicans promise us tax cuts will lead to a surge of investment and growth, but we’ve heard this one before. It didn’t happen when we had big tax cuts under Ronald Reagan and it didn’t happen when we had big tax cuts under George W. Bush.
In both cases, the deficit surged. If there was any positive impact on growth, it was too small to notice and certainly not enough to offset the impact of the tax cut.
The lesson from these prior experiments is that tax cuts lead to less revenue, which means larger deficits. Many of the same people now pushing for tax cuts will start screaming about large deficits when we see a fall in revenue.
This leaves two options: cutting spending or raising taxes on the rest of us. Neither of these prospects looks good for people who don’t own lots of stock in corporate America.
Cutting waste is always popular, but the reality is that there is not much waste sitting there waiting to be cut. The spending that will be slashed is for areas like Social Security, Medicare and Medicaid, programs that have already shown up on the Republican hit list.
There is an alternative route that is more worker- friendly. Corporations are able to reduce their tax rate from the legislated 35 percent rate to the actual rate of 20 percent through a wide variety of tax avoidance measures. Many people also get ver y rich from developing tax avoidance strategies, including many in the private equity industry.
These tax avoidance strategies are a complete waste from an economic standpoint. We want people to make money by developing better products and services, not from devising creative ways to beat the IRS.
If we had a tax reform that raised roughly the same amount of revenue but largely eliminated the opportunities for tax avoidance, this would be a clear winner for American workers. In this case, more resources would be devoted to productive investment rather than gaming the tax code.
It is possible to design a tax reform along these lines. My favorite route would be to require companies to turn over non- voting shares in an amount equal to their tax liability. These shares would give the government no control over the company and would be treated just like regular shares.
If the company pays a $ 2 per share dividend, the government gets $ 2 on each its shares. If the company buys back 10 percent of its stock at $ 100 per share, it pays $ 100 for each share of government stock. This way, there is no way the company can cheat the government without also cheating its shareholders.
This sort of reform would be a good for the economy and good for the nation’s workers. For this reason, unfortunately, it probably will not go ver y far in Washington.
Dean Baker is a co- director of the Center for Economic and Policy Research in Washington, D. C. Readers may write him at CEPR, 1611 Connecticut Ave. NW, suite 400, Washington, D. C., 20009
Labor Day is behind us. And as we look beyond its traditions of barbecues, beaches and vague political promises to help American workers, we can clearly see one concrete action Congress could take to actually increase wages and create jobs: corporate tax reform.
Those opposed to this idea fail to recognize how workers stand to benefit.
They should know it’s real people who ultimately pay for America’s high corporate tax rate. This includes consumers and shareholders, but just as importantly, workers, who receive lower wages as result of high corporate taxes.
The average annual wages of employees at C corporations — most major companies fit into this category — are as much as $4,690 lower because of the high corporate tax rate, according to an analysis by economists at the National Retail Federation.
That’s a stunning number, more than the average American worker’s monthly wage. And it’s backed up by a wealth of other evidence, as government and academic economists agree labor bears between 25 percent and 75 percent of the corporate tax burden.
If you apply those numbers to 2016’s corporate taxes, it means that American workers collectively lost between $75 billion and $225 billion in wages.
Even the low end of that estimate is far too much. That’s why tax reform is critical to creating new jobs and delivering substantial benefits to workers.
Given labor’s share of the corporate tax burden, reducing the tax rate to 20 percent would raise wages by between $32 billion and $97 billion — enough to support between 500,000 and 1.5 million new privatesector jobs.
Reform is a key concern for the retail industry, which holds a unique position regarding both workers and the corporate tax rate.
Retail is the nation’s largest private-sector employer, directly employing 13 million Americans and supporting 42 million jobs overall. The industry is also among those paying the highest taxes, with an average effective tax rate of 36.4 percent when both federal and state taxes are included. Retail businesses see firsthand how high corporate tax rates impact wages and jobs.
Yet many still argue that corporate tax reform would not benefit workers.
Examining an unrepresentative sample of the roughly 1.6 million C corporations in the United States, a report by the Institute for Policy Studies looked at 92 companies that paid an effective tax rate lower than 20 percent and found that more than half had cut jobs between 2008 and 2015.
Based on this small, hand-picked sample and flawed methodology, the report dubiously asserts that corporate tax cuts would yield the same disappointing results.
There are several problems with the institute’s analysis.
First, it only examines a few dozen businesses that are “low effective rate taxpayers,” ignoring those in industries like retail that pay close to the statutory tax rate.
Second, the report does not directly connect tax burden to jobs, only looking at overall employment change during the period studied. The report also does not factor in changes in tax rates, actual domestic tax rates, the economy or any factors that affect hiring.
There are certainly valid concerns about how some firms might respond to tax reform, but the overall picture is clear.
An employee of an American corporation currently forfeits thousands of dollars each year because of the high corporate tax rate.
Tax reform would put money back in their pockets and help create hundreds of thousands of new jobs — an effect that would be amplified by a similar tax cut for non-corporate businesses.
Long-overdue corporate tax reform would mean real change that would last for decades. Even with a busy fall schedule, lawmakers must seize this rare opportunity to push for a tax system that would increase wages, drive job creation and provide meaningful changes for the average American.
Matthew R. Shay is the president and CEO of the National Retail Federation, the world’s largest retail trade association, whose members employ 42 million Americans. Readers may write him at NRT, 1101 New York Ave. NW, Washington, D.C., 20005.