For most its history since the end of the Second World War the United States has enjoyed a healthy and even envious economic growth. But in the last decade, the United States has failed to record a GDP growth of more than 3%. With the end of the last recession in 2009, real annual GDP has never exceeded its highest point of 2.5% in 2010 (the average growth rate for economic recoveries since the 1960’s is 3.9%). Is the recent recession to blame for the slow growth, or are there other forces involved? A study found that the United States’ 39% corporate tax rate ranks third highest amongst 173 qualifying countries and has the top rate among OECD countries; the world average being 22.9%. That means that on average the United States has almost twice the corporate tax rate than the rest of the world! Furthermore, the U.S has a complicated and often costly corporate tax law that lead to distortions and inefficiencies, estimating a total cost incurred by U.S firms of around $40 billion, or 12% of total corporate revenues. This is a huge problem that has inhibited economic growth on many different levels, and here is how:
Aside from electronics and web based industries like social media, many sectors of the American economy have either stagnated or declined. A high corporate tax is harsher on new firms than on firms that are already established, and often entrepreneurs are deterred from creating new businesses in the United States and elect to invest elsewhere. Those few firms that enjoy early success are often bought out by the large and long established companies. This increasing homogeneity and monopolization of companies in America may have contributed to a lack of technological advancements (the latest being the smartphone) that had been a staple of the US economy since the 1960’s. Not only does the US have one of the highest corporate taxes in the world, but most regions across the globe have lowered their corporate tax rates in the past 12 years. A lower corporate tax rate could lead to a significant increase in foreign direct investment (FDI) that could lead to even more job creation and competition. OECD reports suggest that following a 1% tax increase on FDI, there is a resulting 3.7% fall in total FDI. Thus, a significant cut in the corporate tax could incentivize both local and foreign entrepreneurs to start up new business, create new jobs, and increase competitiveness in both domestic and global economies.
One of the reasons that the American economy has been underwhelming is because prices of goods and services have been rising while real wages have largely plateaued. With stagnant wages, rising prices, and less available jobs, consumers are not spending enough deciding instead to save the money they earn in case of another economic crisis. Seeing as consumer expenditure accounted for 68% of total U.S GDP in 2015, it is imperative for the growth and health of the American economy to implement policies that promote spending. One argument against corporate tax breaks in the U.S is that there is no guarantee that firms will take the extra revenue and allocate it for new research, capital, or more labor; instead distributing the extra revenue across management and shareholders. However, the federal government can ensure some of the reallocation of these resources to its labor force by increasing the federal minimum wage rate. The common consensus among economists is that those with lower incomes usually have a relatively higher propensity to consume goods and services. This makes sense since lower income households are constantly purchasing basic goods and services that serve their daily lives as opposed to higher income individuals that might opt to save or invest in their funds in the future since they don’t have any immediate needs. Even if no new jobs are created due to the increase in labor costs, companies would be heavily criticized if they laid out workers following a big cut in corporate taxes. The net effect then is a higher income for lower-income households that have a more of a propensity to consume.
Finally, though it may seem counterintuitive to say, cutting the tax rate on firms could lead to a net gain in tax revenues. The reality is that the vast majority of public revenue comes from taxes on the income of households. According to the Office of Management and Budget of the United States government, individual income taxes accounted for 46.2% of the federal budget in 2014, while corporate taxes accounted only for 10.6%. If indeed reducing the corporate tax rate leads to entry of new firms, the loss of revenue that would have amounted from the tax break could be offset by the number of new firms entering the market that now have to pay taxes. In addition, the federal and state governments will collect a larger amount of tax revenue from households’ incomes, stemming from higher wages and an overall increase in the amount of people employed.
It may seem counterproductive to increase firms’ revenue just to make them reallocate it towards their cost of labor, but the reality is that a simpler corporate tax law and lower rate would save firms billions of dollars in revenue that could easily allow firms to comply with the raise in minimum wage without having to fire many, if any, employees. Furthermore, lowering the corporate tax rate will foster a much more competitive and profitable environment that will incentivize the creation of new local and foreign firms on U.S territory that will help to boost its economy. Not only would this policy create new firms, it would also keep existing firms from transferring their profits abroad in order to avoid the tax fee, and promote the spending of this money on the local economy. Obviously there are other factors that have hindered economic growth in the United States, but it is clear that addressing the high corporate income tax rate is an important first step to tackle the issue.