Introduction
This paper seeks to comprehensively discuss the various issues surrounding corporate tax in the United States. It analyses the core arguments for and against corporate tax reforms as proposed by different stakeholder groups. The paper also looks at the historical trends in corporate tax rates in the US and compares the rates with other major economies.
A background on corporate taxes
Corporate taxes refer to the taxes that corporations or companies pay on their earnings. In the US, corporate taxes are levied at the federal level as well as by individual states. At the federal level, corporate profits are taxed through the corporate income tax. Currently, the corporate tax rate in the US is 21%. states also levy corporate income taxes which vary between 5-12% depending on the state.
Corporate taxes are one of the major sources of tax revenue for the US government. According to the Congressional Budget Office, corporate income taxes accounted for about 7% of total US federal tax receipts in 2018. Corporate tax revenues as a share of GDP and total tax revenues have declined over the past few decades. In 1950, corporate income taxes amounted to about 4.1% of US GDP and accounted for about 27% of total tax revenues. By 2018, corporate taxes were only 1.1% of GDP and comprised just 7% of total tax revenues.
Arguments for corporate tax reforms
There are several arguments that are typically put forth in favor of corporate tax reforms in the US:
High statutory corporate tax rates discourage business investment – With current US statutory corporate tax rate of 21%, the US has one of the highest statutory corporate tax rates amongst OECD countries. Some argue that such high tax rates discourage business investments and thus hurt economic growth. Cutting corporate tax rates could incentivize more business spending and investment.
Tax reforms could boost wages and job creation – Proponents of tax cuts assert that corporations will use the tax savings to hire more employees or raise wages if taxes are reduced. This could stimulate greater employment and wage growth in the economy. Tax cuts free up more capital for productive investments that ultimately create jobs.
Reforms could make the US more competitive – The high US corporate tax rate makes American companies less competitive compared to foreign companies based in countries with lower corporate taxes. Tax reforms could make the US a more attractive place to do business and help American exporters compete against foreign rivals. This may boost US economic output and exports.
Closed loopholes and brought back offshore profits- The 2017 tax cuts bill reduced tax rates while also closing some corporate tax loopholes. It imposed a one-time repatriation tax on overseas profits to bring back trillions in offshore corporate cash holdings to the US. Supporters argue this made the system simpler and fairer.
Arguments against corporate tax reforms
Opponents raise certain concerns about corporate tax cuts and reforms. Their key arguments include:
Tax cuts do not guarantee increased investment- Empirical studies have shown little convincing evidence that tax cuts directly translate to higher investments. Companies may instead reward shareholders through stock buybacks than invest extra in productive assets that create jobs.
Tax cuts do not always raise wages – There is little evidence that corporate tax cuts consistently lead to wage growth. Companies have other priorities than wages. Even if profits rise after tax cuts, wages may remain stagnant if market wages do not rise alongside corporate earnings.
Revenue losses hurt government budgets and priorities – Major tax cuts result in huge losses to government tax revenues. This increases budget deficits and debt which crowds out funds for important services like healthcare, education etc. It shifts tax burden to individuals.
Benefits large profitable corporations more – Not all companies benefit equally from tax cuts as benefits depend on tax liability. Large profitable firms that pay the most taxes benefit most while small struggling firms may see little change.
No impact on competitiveness – Other nations may respond by also cutting their corporate tax rates. Relative competitive positions change little if all nations cut rates together. And non-tax factors like workforce skills, infrastructure are often more important competitiveness drivers.
Encourages more offshoring – Lower domestic tax rates could incentivize more offshoring of operations and profits booking to tax havens to take advantage of even lower foreign tax rates. This makes corporate tax reforms alone inadequate to tackle such tax base erosion issues.
International comparison
Here is how the US statutory corporate tax rate compares to other major economies:
China: 25%
Japan: 23.2%
Germany: 15%
United Kingdom: 19%
Canada: 15%
France: 31%
India: 34.9%
Brazil: 34%
Mexico: 30%
South Korea: 24.2%
Australia: 30%
As seen above, with a 21% rate, the US has a higher statutory corporate tax rate than countries like the UK, Germany, Canada but lower than France and some emerging economies like India and Brazil. Many companies end up paying far lower effective tax rates in reality due to various deductions, exemptions and loopholes.
Trends in US corporate tax rates
Over the decades, there have been significant changes and fluctuations in the US corporate tax rates:
From 1909-1935: The general corporate tax rate fluctuated between 1-13%
1935-1986: The rate gradually rose from 15% to 46%
1986: Tax Reform Act cut rate from 46% to 34%
1990s: Rate was further decreased to 35% by the early 1990s
2004: Rate reduced to 35% from 36%
2017: The Tax Cuts and Jobs Act slashed the rate from 35% to 21%
As seen above, US corporate tax rates peaked at over 46% post-World War 2 but have mostly trended downward since the 1980s due to various tax reforms. The recent cuts under the Trump administration brought rates to their lowest level in decades at 21%. The long-term impacts of this major reform remain unclear as yet.
Conclusion
Corporate tax reforms are a highly complex issue with reasonable arguments on both sides. While tax cuts may provide short-term stimulative effects, there are doubts about their sustainability and impact on inequality, debt levels and non-tax competitiveness issues in the long-run. International tax coordination is also critical to prevent cross-border profit shifting and tax base erosion. Overall, carefully balancing revenue needs, competitiveness and economic growth should guide policy making on corporate taxes going forward. More empirical research is also required to analyze the true effects of the recent US tax cuts and guide future reforms.
Andrew Stroud