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It’s Time to Lower our Corporate Tax Rates

I am in favor of policies at the local, state, or national levels that help can raise employment levels, that can boost wages, lower prices, raise GDP, reduce trade deficits, and that can reduce the need for deficit spending by government. I believe that lower corporate tax rates can achieve all those ends.

Let me be clear: While all those outcomes are possible, none is a foregone conclusion. How corporations choose to respond to lower taxes is an “iffy” thing given the propensity of CEOs and their wealthy cohorts to direct profits to themselves. Since 1990 corporate profits have doubled from 5 to 10 percent, while the effective corporate tax rate has fallen from 32 to 20 percent; yet real wages have fallen from 56 percent of GDP to 53 percent. [1] None of those changes argues for a decrease in the effective corporate tax rate. But most of these data reflect the growing choice of American companies to move assets and operations offshore while escaping taxation, where wages are cheaper, and profits are higher. So any change in the tax code would have to be done with the objective of reducing the need to continue those moves by corporations. Even better, we need to repatriate the $2.1 trillion in profits that now fill the coffers of those companies. [2]

It can be done. Our corporate tax is among the highest in the world. We could reduce it to help make American companies competitive among our trading countries. Such a move would give them the incentive to lower prices somewhat. Competition would determine the extent of how much prices fell. But any lowering of prices is good for consumers. Lower taxes would also give our companies the incentive to raise wages in general, and to boost their lowest wages in particular. They would also provide the incentive to add to business investment, another element of GDP.

But the big change would lie in creating a huge incentive for all companies to repatriate that mountain of $2.1 trillion in corporate profits resting overseas. That could be achieved by assessing them a one-time tax of say, 10 percent to bring that money home. And 10 percent of $2.1 trillion comes to $210 billion. That would provide a mighty boost to GDP, employment, tax revenues, and all the good things that come with economic growth.

That lower repatriation tax would need to be conditional and written into law. We could not take any company’s word that they would do it.

In the end a 10 percent reduction in effective corporate taxes would amount to about a $42 billion tax revenue shortfall. The repatriated tax, however, would be 5 times that amount. That would be better than just another a good idea. It would just what our economy needs.

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[1] New York Times, April 4, 2014
[2] MarketWatch, Oct. 6, 2015