What About Those Pesky Corporate Tax Rates?

I am helping my readers understand what is going on with politics……..now that the “cliff” drama is finished and the “debt” drama begins again….there will be media all over the GOP and their desire to lower corporate tax rates….and the argument will be lower rates will create jobs…..yes, that magical subject that get people elected…..you know that issue that all politicians talk about and then do NOTHING to create them?  After all this is an issue that they love to taunt at every economic get together……..

Let’s be honest about the rates….yes they are high in the US….but once corporations use all their tax incentives it is quite low…..let’s look at a few things…….

  1. The federal corporate income tax rates were the highest in US history when the unemployment rates were the lowest in US history. From 1951, when the top marginal corporate income tax rate rose from 42% to 50.75%, to 1969, when rates peaked at 52.8%, the unemployment rate moved from 3.3% to 3.5%. From 1986 to 2011, when the top marginal corporate income tax rate declined from 46% to 35%, the unemployment rate increased from 7% to 8.9%.
  2. A “tax holiday” in 2004, which temporarily lowered the corporate income tax rate for companies that brought back cash stored overseas, resulted in companies cutting jobs. In 2004, Congress passed a repatriation tax holiday that allowed companies to bring back profits earned abroad at a 5% income tax rate instead of the top 35% rate. Fifteen of the companies that benefited the most from the tax holiday subsequently cut more than 20,000 net jobs.
  3. Companies hire employees because they need workers, not because of corporate income tax rates. According to a Nov. 15, 2011 blog post from billionaire Dallas Mavericks owner Mark Cuban, “you hire people because you need them. You don’t hire them because your taxes are lower.”   In a July 2011 survey of 53 prominent American economists, 65% said that lack of demand was the main reason why employers were not hiring new employees as compared to 27% who said that uncertainty about corporate taxation was the main reason.
  4. Complaints about high federal corporate income tax rates causing high employment are unfounded because loopholes and deductions enable many companies to pay less than the statutory rate. Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a total corporate tax rate – federal and state combined – of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%.    General Electric, a multi-national corporation with net income of $14.16 billion, paid an effective tax rate of 7% in 2010.   A 2011 study comparing the effective tax rates of the 100 largest US multinationals to the 100 largest European Union [EU] multinationals during the period of 2001-2010 found that EU multinationals have a higher average effective tax rate despite having to pay a lower statutory rate.
  5. Corporate profits in the United States are the highest they have been in 61 years, yet the federal unemployment rate is higher than most of the rest of the developed world. In 2011, corporate profits made up 10% of US GDP, the highest percentage since 1950.   In 2011, the US unemployment rate was 8.9% compared to the OECD (Organisation of Economic Cooperation and Development) average of 8.2%.   Despite the highest corporate income tax in the world, corporate income tax revenue only brought the US federal government the equivalent of 1.2% of GDP in 2011 (the lowest percentage in recorded history), compared to the OECD average of 2.9% in 2010.
  6. Lowering the corporate tax rate raises the deficit, which hurts job creation. Lowering the federal corporate tax rate reduces the amount of money the US government receives in tax revenue, thus reducing federal government programs, investments, and job-creating opportunities. When the Tax Reform Act of 1986 reduced the top marginal rate from 46% to 34%, the federal deficit increased from $149.7 billion to $255 billion from 1987-1993.
  7. Complaints about high federal corporate income tax rates causing high unemployment are unfounded because corporations are sitting on record amounts of cash. As of Oct. 23, 2012, large companies listed in the S&P 500 are holding onto $1.5 trillion in cash (14% of their total value), the highest amount in American history.   This cash could, but is not, be used to hire more employees and lower the unemployment rate. President Obama, in a July 22, 2009 press conference, stated “there have been reports just over the last couple of days of… companies making record profits, right now. At a time when everybody’s getting hammered, they’re making record profits.”
  8. The US economy added 15 million jobs in the five years immediately following a large federal corporate income tax increase in 1993. The Omnibus Budget Reconciliation Act of 1993 added three new corporate tax brackets and increased the income tax rates for corporations making income over $10 million.   The US economy added more than 15 million jobs and grew at an average annual rate of 3.8% in the five years after the legislation was passed.

There are other considerations that should be pointed out before this pack of crap is packaged and sold to the public…..

Corporate profits are at record highs, while corporate taxes are at record lows. While the U.S. has a 35 percent corporate tax rate on paper, few corporations actually pay that, due to a proliferation of loopholes, deductions, and the widespread use of tax havens. In 2011, the last year for which data is available, the effective corporate tax rate fell to 12.1 percent, a forty-year low. The corporate tax used to track resonably well with corporate profits, but the two have become decoupled in recent years, with profits shooting up while corporate taxes as a share of the economy plummeted.

Many of the biggest corporations pay no corporate income tax at all. As Citizens for Tax Justice has found, many of the biggest corporations have effective tax rates near zero. 26 major corporations paid no corporate income tax between 2008 and 2011, while making a collective $205 billion in profits.

The GOP’s favorite corporate tax idea helps outsource jobs. Republicans love to promote a “territorial” corporate tax system, under which offshore profits made by U.S. companies are never taxed. (Currently, those profits are taxed when they are brought back to the U.S.) The Congressional Budget Office recently reported that such a plan results in “increasing incentives to shift business operations and reported income to countries with lower tax rates.”

Corporate tax reform should raise revenue. Corporate taxes used to make up about one-third of federal revenue; now it makes up less than 9 percent. The U.S. used to raise about 5 percent of GDP in corporate tax revenue; now it raises below 2 percent. As former White House economist Jared Bernstein noted, “locking in these historically low revenue levels, either as a share of GDP, total receipts, or profits, would be yet another self-inflected wound.”

We will see lots of media coverage when this becomes a priority and depending on the news cycle…….this is one of those issues that will be obfuscated to the point that NO one knows what the truth is or should be……these that I offer may not be the absolute truth but some points that I found and wanted to pass on to you….hopefully it will ease the headaches that will be born trying to follow the antics coming from media and politicians……good luck……

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11 thoughts on “What About Those Pesky Corporate Tax Rates?

  1. Very good article, filled with a lot of flawed theory, but still it brings a very important topic to the table. I agree that multi-national corporations are big part of the economic trouble we are in today but the answer to this problem is not more government, which seams to be every progressive’s or Democrat’s solution to any problem.

    Most of those multi-national corporations, like GE, get their loop holes through their partnership with politicians, see friendships like that between Jeffrey Immelt and President Barack Obama. As long as people allow the government to interfere in business we will continue to see large corporations buying politicians. If we take the power to pick winners and losers away from the politicians then it will not be cost effective for corporations to purchase politicians.

    There is also the American consumer to blame. If they did not buy products made in China, companies would stop making their products in China. But as long as the American consumer is happy buying foreign products because it cost the least our economy is going to continue to send profits over seas. The one law of economics that America has forgotten is that “wealth flows from the consumer to the producer”.

  2. A seriously flawed article.

    Domestically, corporate taxes are nothing more then a hidden tax on the poor and middle class. Internationally, U.S corporate taxes sends manufacturing jobs that help the poor and middle class overseas.

    Your point about needing more regulation because “corporations will not be better by the kindness of their souls” missed the fact that corporations lobby for those regulations. The best friend of the consumer is competition. Must reading is “In restraint of trade: The business campaign against competition, 1918-1939″ http://www.amazon.com/In-Restraint-Trade-Competition-1918-1938/dp/0838753256

    The unemployment numbers you quote have more to do with other factors then the corporate tax rates. In the 1950’s it didn’t much matter what our corporate tax rates were because the manufacturing base of most of the countries in Asia and Europe were still rebuilding. If you wanted a radio, washing machine, car, etc the United States had it and the taxes didn’t much matter.

      • @lobotero: Corporate taxes would not directly affect employment. Eliminating, or lowering to be more rational, the corporate income tax would lower the cost of goods. With lower prices we would see an increase in demand and with an increase in demand you would see an increase in employment.

        Of course there are a lot of other factors to consider in order to see an increase in employment and corporate income tax is only a small part of it.

        @John Galt: You brought up the other forgotten law of economics, “Businesses do not pay taxes, consumers pay taxes.” When ever the cost of doing business goes up, for whatever reason, the cost of goods to the consumer goes up with it. When you increase the corporate income tax the corporation needs to increase prices or lower costs some where else (like salaries or number of employees) to continue to meet their dividend projects to share holders. That is one law of economics that the left does not like to acknowledge.

      • FL, I know…but to listen to politicians the lowering of these taxes will solve almost all the economic problems….we hear that a lot….but corporations pay very little in taxes and the demand is still not there….so if we put it on the books that they pay no tax then magically demand will raise…..personally, do not believe that at all….

      • There is your first problem, you listen to politicians :)

        I agree that reducing corporate taxes would not increase demand, but lowering the price of goods would.

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