Thursday, December 14

Corporate Tax Rates

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Corporate Tax Rates

The reduction of corporate tax rates is often proposed (generally by Republicans) as a stimulus to the U.S. economy. They claim the U.S. has the highest corporate tax rates among the industrialized countries, and that is a serious hindrance to growth for U.S. corporations. Japan and Germany have higher rates than the U.S., but the rates here are higher than in most other countries. So the statement is not completely accurate, but instead of splitting hairs, look at the careful wording of it. They always refer to corporate tax rates, not to the taxes corporations actually pay. The rates are higher than in most other countries, but Congress has created a labyrinth of tax credits and arcane accounting rules that results in a lower effective tax rate for corporations in this country than in most other nations. Actual taxes paid by Fortune 500 companies show an effective tax rate of less than half the statutory rate.

From 1998 through 2005, two out of three U.S corporations paid no federal income taxes. For the most recent year, General electric paid zero. ExxonMobil paid a significant amount but not in the U.S; their U.S. tax bill was zero. Chevron also paid out a lot of money in taxes—in other countries. Their U.S. tax bill was $200 million on sales of $172 billion. Bank of America paid zero. Citigroup paid zero. Valero paid zero.

The argument (again, mostly by Republicans) is that lowering corporate tax rates will free up cash for corporations so they can afford to hire more people, thus addressing the most serious economic problem in this country today, which is the millions of people who cannot find work. There is no compelling evidence that if tax rates were lowered, U.S. corporations would hire more people. If they did decide to spend the extra money to expand and hire new people, they might well do that in another country. It would be their money and they could spend it anywhere they like. Or they could just keep it and not spend it at all. After all, that is what they have chosen with recent earnings. Corporations currently have $1.5 trillion in extra cash and they have shown no inclination to use any of that to hire more people.

Lowering corporate tax rates would simply allow corporations to have more cash. Undoubtedly a lot of executives would get bigger bonuses but there is no reason to assume the company would actually hire more people in this country. They already have a mountain of cash and have shown no inclination to take on more employees. They try to tell us that the reasons they do not hire are twofold. First, sales are not where they would like them to be, so they are antsy about expansion. Of course sales are lower than they would like, because too many people are out of work. Those who do not have jobs only spend on necessities. If companies would expand and hire more people, sales would go up. Until that happens, sales are going to be stagnant or very slow in growing. The second reason they give is “uncertainty” about future plans by the government. That is pure nonsense. There never has been and never will be any high degree of certainty about what Congress will do next.

Lowering corporate tax rates will reduce federal revenue and increase compensation for some executives. If we were to try to tackle the incredible maze known as the tax code that would be a different matter. But if congress tried to make the tax code for corporations more rational and tried to make it as fair as possible, lobbyists would have their heads. We have a truly bizarre assortment of rules that effectively hand out government money in a variety of ways (subsidies, grants, tax credits, special accounting practices). This has been called by some “corporate welfare”. If we ended all of that, we could lower corporate tax rates significantly and still increase federal revenue. But every time Congress considers ending a subsidy or a tax credit, some businessman (who is, of course, vigorously opposed to government “intervention” in business practices) cries that it would somehow be unfair to end that specific government support for that specific business.


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