Corporate Tax Cuts – A Crazy Idea

Let’s think about the real world in which we Americans live. We just suffered three devastating hurricanes inflicting horrendous damage and untold suffering on parts of Texas, Florida, the U.S. Virgin Islands and Puerto Rico. The cost to the federal government after the Katrina Hurricane in 2005 eventually totaled roughly $108 billion. Cleaning up from these three hurricanes likely will cost taxpayers hundreds of billions of dollars.

Then there are the roads, bridges, tunnels, airports, water and sewage systems. In March of this year the American Society of Civil Engineers gave the United States a grade of D+ on its infrastructure and estimated that it would take $2 trillion over a decade to repair it.

At the same time the president has announced that he wants a huge defense buildup and recommitting to waging the war in Afghanistan, defeating ISIS and containing Russia and China. He seeks an additional $40 billion annually, meaning that the defense budget would go from approximately $580 billion per year to well over $700 billion in a few years. Meanwhile, non-discretionary spending on things like education, housing and nutrition would plummet — close to $1.6 trillion over 10 years.

And now we have the administration’s tax plans, at least a general outline. The highlight is cutting corporate taxes. The president had wanted to reduce the current statutory rate of 35% of profits to 15%. According to independent budget experts and economists, that would have cost the government $2.4 trillion over 10 years. The administration agreed to scale back to 20%, at a cost of $1.5 to $2 trillion.

Proponents of the corporate tax cut insist that cutting taxes will generate economic growth, spur business investment and restore American competitiveness. This is nonsense.

In April 2016, the U.S. Government Accountability Office issued a report on corporate taxes covering the years 2006 to 2012. It reported that at least two-thirds of all active corporations had no federal tax income liability. Among large corporations, 42% paid no federal taxes in 2012. For tax years 2008 to 2012, profitable large corporations paid federal income taxes amounting to only about 14% of their pretax net income.

Corporations do not pay the 35% statutory rate. Nor are U.S. corporations suffering compared to foreign competitors in most developed countries.

The effective U.S. corporate tax rate on profits from new investments is about 24%, not the official statutory rate of 35%, according to the Center on Budget and Policy Priorities. U.S. multinationals, in fact, pay about 28%; multinational corporations in the other G-7 industrialized democratic countries pay 29%. U.S. corporations are not at a disadvantage.

In fact, the tax burden on U.S. corporations has declined over the years. As a share of U.S. GDP, U.S. corporate taxes have trended steadily downward since the end of World War II. In 1950, at the time of the Korean War, they hit a high of 6%; in recent years, the figure has hovered between 1% and 2% of GDP, according to charts produced by the Urban Institute and Brookings Institution Tax Policy Center.

U.S. corporations do not need lower taxes in order to invest and innovate. Their taxes have gone down while their profits are at all-time highs. The largest and most profitable U.S. corporations increasingly use their profits to buy back shares and pay higher dividends rather than to innovate. According to a Reuters study in 2015, their buybacks and dividends amounted to 113% of their capital spending (compared to 60% in 2000 and 38% in 1990). Meanwhile, the proportion of net income spent on innovation has declined.

Corporate tax cuts will not spur any significant economic growth. According to a study by the Congressional Research Service in 2014, a 10% cut in corporate taxes would cost the Treasury between $1.2 and $1.5 trillion in revenues while having only a “one-time increase of less than two-tenths of 1% of output.” This accords with many other studies: corporate tax cuts have only a slight impact on economic growth, but they engender huge deficits and cap spending in the future.

We Americans need to get a grip on reality. The U.S. government needs more revenue, not less. We have desperate needs to recover from disasters, build roads, bridges, and airports, repair water and sewage systems, modernize and reconfigure our military capabilities, and care for the growing proportion of elderly Americans. We need to spur economic growth by cutting the burden on workers and middle class Americans, boosting the burden on the wealthy, and stimulating overall demand. Corporate tax cuts are a crazy idea.