The top U.S. corporate tax rate is the highest in the developed world. President Trump has vowed to cut it sharply. He should eliminate it outright. Here’s why:
- Employees and Consumers Pay — According to the Congressional Budget Office, over 70% of the corporate tax burden is born by labor in the form of reduced wages when capital is mobile and can be moved offshore. American Enterprise Institute economists found that wages fall by 0.5% for every 1% increase in the corporate income tax. When capital is not mobile, either consumers bear the burden in higher prices or investors bear the burden. Corporate investors are mostly households. According to David Kostin at Goldman Sachs, 79% of publicly traded stock is effectively owned by households through direct ownership, mutual funds, pension funds, and insurance policy holdings.
- Increased Competitiveness — The current marginal corporate tax rate penalizes domestic job creation and economic growth. This is certain. The Organization for Economic Cooperation and Development (OECD) reports, “Corporate taxes are found to be most harmful for growth.” This is why state governments bend over backwards to offer tax breaks to relocating businesses. It is why Ireland’s stagnant economy took off when the top corporate tax rate was lowered to 12.5%.
- Ends Inversions— Corporate inversions occur when a U.S. company buys or merges with a foreign company in a lower tax country, making the foreign location the nominal headquarters to escape U.S. taxes or foreign earnings, though still paying U.S. taxes on U.S. earnings. Eliminate the corporate income tax and the incentives for inversions disappears overnight.
- Ends Excessive Taxation — A corporation is taxed at the 35% marginal rate (not including state income taxes). Then, any profit that is paid out as dividends is taxed at 23.8% (20% dividend tax plus 3.8% Obamacare tax). Effectively dividends are taxed at a rate above 50%.
- Less Disadvantages for Small Business — The top marginal corporate tax rate is 35%, but the effective tax rate is only 12.6%. Large corporations legally shield profits by keeping foreign earnings offshore and taxing advantage of loopholes and sweetheart deals pushed through Congress. For example, the New York Times reported that G.E. earned $5.1 billion profits from U.S. operations in 2010 ($14.2 billion worldwide) and not only paid no taxes, but received a $3.2 billion tax benefit. This wasn’t a one-off event. For the five year period ending in 2010, G.E. earned $26 billion domestically and managed to achieve a $4.1 billion tax benefit. This type of legal tax maneuvering is simply too expensive for small business owners.
- Less Lobbying — Eliminate corporate income taxes and eliminate much of the reason for corporate lobbying and the resulting inherent corruption of crony capitalism.
- Less Incentive For Debt – Excessive debt reduces the ability of a company to weather a financial crisis or economic downturn. The corporate income tax encourages companies to take on debt to finance investments since interest is deducted. If the corporation finances investments through equity, paying dividends to shareholders, the dividends are taxed. If the company reinvests profits, they are not reflected in the basis of the company’s asset value and are taxed as capital gains when the stock is sold.
- Level Playing Field — Today some non-profits compete with for profit firms without the burden of taxes. Eliminating the corporate income tax levels the playing field without hurting the non-profits.
- Less IRS Abuse — Eliminating the corporate income tax takes power away from the IRS, which has demonstrated its potential to abuse its power in recent years.
- Better Economic Choices — When corporations are investing their assets, they make better economic decisions than the government. Government decisions are political and usually have poor results economically. The nation as a whole benefits when economic decisions are left in private hands.
- Paying for It — For all of the harm it does, the corporate income tax collects relatively little money. It accounts for 11% of the federal budget, around 2% of GDP. Some of the apparent shortfall from its elimination can be made up by taxing dividends as ordinary income. The rest will be more than made up from economic growth, wage growth, and a larger workforce. In addition, U.S. corporations will no longer have a reason to keep the $2.1 trillion of profits parked offshore, resulting in a real, private sector driven stimulus that’s lasting.
Matt Michell is CEO of Service Nation Inc., which operates the Service Roundtable, Retail Contractor Coalition, Service Nation Alliance, and Roundtable Rewards buying group. Learn more at ServiceRoundtable.com.