What’s the best argument for reducing the onerous 35 percent corporate tax rate in the United States?
- 1. Should the rate be lowered because it’s embarrassing that America has the highest corporate tax rate in the developed world, and perhaps the entire world? That’s certainly a persuasive reason for a lower rate.
2. Should the rate be lowered because workers will have more jobs and higher pay when companies invest more? That should be a very compelling argument to slash the rate as much as possible.- 3. Should the rate be lowered so companies no longer will have a big incentive to “invert” to other countries? That’s probably a strong argument for some people, but not for me since I’ve never objected to inversions.
- 4. Should the rate be lowered to mitigate the anti-competitive impact of America’s worldwide tax system? Sure, that would help, but I would prefer to directly solve the problem by shifting to territorial taxation.
- 5. Should the rate be lowered so companies have more incentive to focus on earning money and less incentive to utilize corrupt tax breaks?
That would be a win-win outcome for the American economy. - 6. Should the rate be lowered because the corporate tax is actually a levy on workers, consumers, and shareholders? It is silly that we pretend to tax companies when the ultimate tax is paid by individuals.
- 7. Should the rate be lowered to reduce the bias for debt? A lower rate would mitigate that problem, though it would be better to directly solve the problem by getting rid of the double tax on dividends.
- 8. Should the rate be lowered to reduce the amount of money going to Washington? I’m in favor of “starving the beast,” but a lower corporate rate may not be effective because there will be considerable revenue feedback.
These are all good reasons to dramatically lower the corporate tax rate, hopefully down to the 15-percent rate in Trump’s plan, but the House proposal for a 20-percent rate wouldn’t be a bad final outcome.
But there’s a 9th reason that is very emotionally appealing to me.
- 9. Should the rate be lowered to trigger a new round of tax competition, even though that will make politicians unhappy? Actually, the fact that politicians will be unhappy is a feature rather than a bug.
I’ve shared lots of examples showing how jurisdictional competition leads to better tax policy.
Simply stated, politicians are less greedy when they have to worry that the geese with the golden eggs can fly away.
And the mere prospect that the United States will improve its tax system is already reverberating around the world.
The German media is reporting, for instance, that the government is concerned that a lower corporate rate in America will force similar changes elsewhere.
The German government is worried the world is slipping into a ruinous era of tax competition in which countries lure companies with ever-more generous tax rules to the detriment of public budgets. …Mr. Trump’s “America First” policy has committed his administration to slashing the US’s effective corporate tax rate to 22 from 37 percent. In Europe, the UK, Ireland, and Hungary have announced new or rejigged initiatives to lower corporate tax payments. Germany doesn’t want to lower its corporate-tax rate (from an effective 28.2 percent)… Germany’s finance minister, Wolfgang Schäuble, …left the recent meeting of G7 finance ministers worried by new signs of growing beggar-thy-neighbor rivalry among governments.
A “ruinous era of tax competition” and a “beggar-thy-neighbor rivalry among governments”?
That’s music to my ears!
I”d much rather have “competition” and “rivalry” instead of an “OPEC for politicians,” which is what occurs when governments impose “harmonization” policies.
The Germans aren’t the only ones to be worried. The Wall Street Journal observes that China’s government is also nervous about the prospect of a big reduction in America’s corporate tax burden.
China’s leaders fear the plan will lure manufacturing to the U.S. Forget a trade war, Beijing says a cut in the U.S. corporate rate to 15% from 35% would mean “tax war.” The People’s Daily warned Friday in a commentary that if Mr. Trump succeeds, “some powerful countries may join the game to launch competitive tax cuts,” citing similar proposals in the U.K. and France. …Beijing knows from experience how important tax rates are to economic competitiveness. …China’s double-digit growth streak began in the mid-1990s after government revenue as a share of GDP declined to 11% in 1995 from 31% in 1978—effectively a supply-side tax cut. But then taxes began to rise again…and the tax man’s take now stands at 22%. …Chinese companies have started to complain that the high burden is killing profits. …President Xi Jinping began to address the problem about 18 months ago when he launched “supply-side reforms” to cut corporate taxes and regulation. …the program’s stated goal of restoring lost competitiveness shows that Beijing understands the importance of corporate tax rates to growth and prefers not to have to compete in a “tax war.”
Amen.
Let’s have a “tax war.” Folks on the left fret that this creates a “race to the bottom,” but that’s because they favor big government and think our incomes belong to the state.
As far as I’m concerned a “tax war” is desirable because that means politicians are fighting each other and every bullet they fire (i.e., every tax they cut) is good news for the global economy.
Now that I’ve shared some good news, I’ll close with potential bad news. I’m worried that the overall tax reform agenda faces a grim future, mostly because Trump won’t address old-age entitlements and also because House GOPers have embraced a misguided border-adjustment tax.
Which is why, when the dust settles, I’ll be happy if all we get a big reduction in the corporate rate.
Yes! Yes! Yes!
If #6 is true, then why not lower the corporate tax rate to zero?
I’m OK with a corporate tax rate of zero. Corporate income would be taxed at only the individual shareholder level, same as pass-through businesses.
It is at the business level that society creates jobs and either creates or realizes productivity gains and innovation. Which means that prosperity and a higher standard of living are created at the business level. Which means it makes good sense to erect the smallest possible tax barrier at the business level. Assuming we like widespread prosperity…
https://caseforcapitalism.wordpress.com/
@ Henry Van Gieson III
I think they should be lowered to zero. But I would be happy to lower the rates to 15%. It goes back to the perfect being the enemy of the good. I would also like income taxes reduced to zero (regardless of the size of government) because it distorts the labour market, but I would be more than happy to have reduced rates overall.
John:
While taxing dividends instead of corporate taxes sounds good, the problem is that around 50% of outstanding shares are held in tax-preference accounts (pensions, endowments, charities, etc.).
True. And a zero rate seems extremely unlikely to ever actually happen, so this is all pie-in-the-sky theoretical thinking. In that realm, what is your big concern? That government loses some of the current corporate tax revenue? I’m OK with that, theoretically. And tax-deferred accounts pay taxes eventually.
It seems like in post-Great Recession era of low interest rates, companies have not spent very much on capital expenditures (part of the reason why unemployment/underemployment has remained so high). It seems like a lower corporate tax rate will not ameliorate this nagging situation. Thoughts?
krismkanya,
There are always lots of moving parts in the economy, so no guarantees for any given period. However, companies DO evaluate their capital investments using after-tax cash flows, so I think a lower corporate tax rate would encourage more investment. A factory investment looks more attractive with 15% taxes than with 40% taxes.
Probably an even more effective way to encourage new investment is to allow it to be deducted on the tax return immediately, rather than depreciating it over the useful life.
Great post, two minor points-
It’s not just ‘workers’ who bear a share of the taxes it’s suppliers of all kinds, including contract workers and owners of unincorporated business. And even where shareholders, suppliers or customers are corporate, all that happens is the tax gets passed on, and on through corporations until, boom, an individual pays.
Also,don’t forget internationally owned shares. I’m Canadian and have some money in the NYSE and I must, in fairness, pay a tax on any dividends I get and take home to Canada. How much? You don’t want to leave me too much, nor do you want to take too much less foreigners stop investing in the USA. I would sure like to know what portion of publicly traded American shares are foreign owned.
[…] The Most Persuasive Argument for Slashing the Corporate Tax Rate […]
Higher corporate taxes are also paid in part by shareholders, driving many foreign shareholders to foreign investments at the margin.
In summary, the US has one of the top business climates in the world (the high standard of living in America is not coincidental in that respect) but a high corporate tax rate is one of the reasons that prevents this potential from being fully realized.
But we seem to keep this higher tax rate to give politicians more money to inefficiently distribute and buy votes of state dependence and incentives to indolence.
It is high time we reverse this one way ruinous trajectory towards more and more statism, coercive collectivism, lower motivation.
Humanity, for the first time in human history, has finally reached potential sustainable growth trendlines of five to six percent — something that obviously has the potential to propel our lives to fantastic new heights in a few decades, and radically uplift the standard of living of our children– but a stubborn infatuation with statism in the western world prevents humanity from fully realizing this potential.
Some countries will break out of this statism rut for sure. But if you live in a country that lags behind in that front — then you’re probably toast.
Stay mobile.
John:
The discussion revolved around eliminating the corporate tax by taxing investors. My only point was that the two are not equal. It would be my preference to eliminate the tax for investors.
John:
Good point on after-tax flows for both corporate managers and investors.
If it takes a pre-tax return of 24% in order to make after tax 10%, and tax is lowered so a 20% pre-tax yields 10% return, there will be a lot of additional projects taken on that have pre-tax returns between 20% and 24%.
{Assuming that the investor’s hurdle rate for investment is after-tax 10%.}
nedlandp,
Your comment about additional projects being done due to a lower hurdle rate is why I think it makes sense to have zero tax at the business level (although politically impractical and with the possible up-front revenue reduction you mentioned).
Business investment is very good for prosperity, so it’s beneficial to discourage it the least. A tax rate on businesses of zero does the least discouragement. I don’t think many publicly-held corporations consider the tax situation of their shareholders when evaluating potential investments, but they certainly do consider their own.
So if govt is going to raise $100 of taxes A) at the business level, or B) at the shareholder level, or C) split between them, it seems to me we’d optimize investment and prosperity with option B. That is, minimizing the tax at the business level because that is where investment decisions are made.
The individual investor essentially pays the $100 of taxes either way, through lower after-tax corporate income or on their personal tax return. But if the business entity itself is not taxed, that should maximize investment (or discourage it the least). I think this makes sense.