High Corporate Income Tax = Less Pay For Workers

I have argued recently that one of the first things Congress should do is lower the corporate income tax from 35% to 15% (or at least 20%) – even if broad-based tax reform has to wait until next year.

I have also argued for an immediate one-time corporate tax rate, say 10%, on profits held outside the US – which are estimated to be $3 trillion or more. I put these two tax cuts at the top of the list because I feel they could spur the economy almost immediately.

Most Democrats oppose these two tax cuts in particular because they say they largely benefit the rich. Yet what liberals fail to understand is the fact that high corporate tax rates also mean less pay for the nation’s workers. I’ll explain why that is below.

Let’s start by acknowledging that America’s corporate tax rate of 35% is the highest in the developed world. Add on another 5% average in state and local taxes, and you get to a 40% corporate income tax in most states. Take a look at how out of whack we are:

Notice that the global average corporate income tax is 24.26%, and countries like Ireland, Hong Kong and Singapore are below 20%. Even Britain is below 20%.

The corporate income tax has long been recognized by economists as one of the worst taxes. That’s because it is passed along to consumers in terms of higher prices, to stockholders in terms of lower dividends and capital gains and to workers in terms of lower wages.

Numerous studies over the years have shown that most of the corporate tax falls on the workers. Consumers, for example, resist higher prices and can often buy similar goods and services from foreign producers where the tax rate is lower.

Likewise, investors have many options as to where to put their money – including thousands and thousands of domestic and international investment funds and other products in which to invest.

Yet the average worker has fewer options and hence suffers most from the 40% corporate tax.

Most economists agree that America’s sky-high corporate income tax rate is among the main reasons why wage growth has been so slow since the end of the Great Recession. According to the Labor Department, US wage growth has increased only at the rate of apprx. 2.5% over that period.

As noted above, American corporations are now reported to have more than $3 trillion in profits held outside the country, which they are reluctant to bring back to the United States because of how heavily it would be taxed. Most corporate CEOs would like to bring that money home, but only if it is taxed at reasonable rates.

We now have the absurd situation where Apple borrows money (in the US) to pay dividends to its stockholders, while at the same time holding several hundred billion dollars overseas. That means it is cheaper to pay the interest on the borrowed funds than to bring their money home because of the huge tax implications.

Many on the left argue that we can’t afford a corporate income tax rate cut (even though they couldn’t care less if we run budget deficits year after year). They refuse to consider how a tax cut, and the repatriation of trillions from abroad, could spur economic growth.

Now it is true that tax cuts don’t pay for themselves immediately. Take President Reagan’s broad tax cuts in the 1980s. Most economists agree that it took around 6-7 years to pay for those tax cuts. Yet in the meantime, many millions of Americans got jobs at higher real wages, many of which would not have happened without the tax cuts.

As noted at the beginning, I would urge Congress to immediately cut the corporate income tax rate to 15% from 35%, and instate a one-time tax rate of 10% for repatriating the $3 trillion or so in profits held outside the US. Do I think that is likely to happen? Sadly, probably not.

While President Trump cut a bad deal with the Democrats yesterday to temporarily raise the debt ceiling and fund the government through mid-December, this just pushes the budget deadline down the road until just before the holidays – when another battle is all but inevitable.

So, don’t hold your breath on a corporate tax cut just ahead.

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