The incoming Trump administration has proposed lowering the U.S. corporate income from 35% to 15% in order to stimulate the economy and create more American jobs. The U.S. marginal tax rate of 38.9% (a combination of the federal tax rate of 35% and the average tax rate among the fifty states) is the third highest in the world after the United Arab Emirates’ rate of 55% and Puerto Rico’s rate of 39% (the island is not actually a country but has commonwealth status within the U.S.). According to a 2016 report by the Tax Foundation, the American marginal corporate tax rate is 16.4 percentage points higher than the worldwide average (188 countries) of 22.5%. A plurality (43) of the 188 countries examined had corporate income tax rates in the range of 25% to 30%.
The Effects of Cutting Taxes
The Irish government lowered its corporate tax from 32% to 12.5% and grew GDP by 26.3% in 2015.
The benefits of lowering the corporate tax rate vastly outweigh the costs. The incoming Trump administration wants to bring back an estimated $2.5 trillion in foreign earnings by American corporations that remain untaxed until they are repatriated to the U.S. This repatriation would provide revenue to the federal government, which currently maintains an annual budget deficit of almost $600 billion, but more importantly this flow of capitalization will allow for badly needed private sector infrastructure development as well as for research & development.
The U.S. is in need of long-term infrastructure development in both the public and private sectors in the area of $17 trillion (equivalent to the country’s gross domestic product – GDP – minus its shadow elements). The lowering of the corporate tax rate will provide much needed debt-free capitalization, new jobs (particularly in the high tech industry), and new tax revenue.
The U.S. government’s General Accountability Office reported in March of 2016 that at least two-thirds of all active U.S. corporations generate no federal income tax liability. Therefore, the lowering of the current corporate tax rate will have a much more direct impact on overseas foreign earnings and the consequential generation of tax revenue from that source. In addition, the creation of new jobs will add to the tax coffers by way of increases in personal income tax and payroll tax (e.g., social security & Medicare) revenues. Correspondingly, the pressure on unemployment benefits and other social program expenditures will go down.
Look at Ireland
Though there is speculation as to the actual impacts of a corporate tax cut, Ireland can provide positive insight. The Irish government gradually lowered its corporate tax from 32% to 12.5%, generating a staggering gross domestic product growth of 26.3% in 2015 (compared to the anemic equivalent of 2.4% for the U.S. for the same year – with a dubious consumer price index calculation that decreases the impact of inflation and, therefore, increases the real GDP number). The lowering of the Irish tax rate has generated significant foreign direct investment including from American corporations such as Apple, Google, and Microsoft who have all established subsidiaries on the island to benefit from the lowered rate.
Though much of the Trump campaign focused on losses in manufacturing jobs, the lowering of the American corporate tax rate cannot be seen as a panacea for an American renaissance in the manufacturing sector. The U.S. Department of Labor’s bureau of statistics documents that U.S manufacturing jobs dropped 37% from 19.5 million jobs (at its peak in 1979) to 12.3 million in 2015 (a net loss of 7.2 million jobs). The manufacturing sector will continue to be challenged through increased industrial robotics just as job displacement will occur in the service economy with the gradual introduction of humanoid androids.
Lowering the corporate income tax can help control inflation and increase consumer purchasing power.
However, a Trumpian carrot-and-stick policy of corporate tax cuts and tariffs on products of U.S. companies that have left the country can stabilize the manufacturing sector in the short term. The impact of a cut of the U.S. corporate tax rate should be seen within a larger macroeconomic context of increased capitalization that emphasizes equity financing (from repatriated funds) over debt financing which loses its tax deductibility allure with a low 15% rate.
A lower corporate tax rate increases American competitiveness while providing an increased flow of domestic, debt-free capital that will boost investments and production. In reality, a corporate income tax often serves as a second retail tax for consumers. The lowering of such a tax can reduce prices within a competitive environment, thus controlling inflation and increasing consumer purchasing power. A further benefit of lowering the tax is to allow for higher wages and benefits – two areas that often bear the burden for paying corporate income taxes.
By reducing the corporate tax rate, the United States will be following the recent example of many nations. According to the Tax Foundation, the worldwide average of corporate tax rates declined from 30% in 2003 to 22.8% by 2015. The downward trend was reflected in all regions of the world, thus demonstrating a growing consensus as to the disruptive and detrimental impact of excessive taxation.