Corporations and their representatives in Congress and the administration are pushing hard for "corporate tax reform." What this really means is even more tax cuts for the rich. As a vote approaches there will be a well-funded disinformation campaign to push these cuts. Watch out for this. What the country really needs is a return to the 50 percent corporate tax rate.
The Push To Cut Corporate Taxes Again
Corporations and their representatives (also known as "members of Congress") are pushing for "corporate tax reform" – which is another way of saying "another cut in corporate tax rates." Many news outlets are suggesting that the new Republican-led Congress will be able to find "common ground" with President Obama in this effort.
The main argument for another cut in corporate tax rates is that "The U.S. has the highest corporate tax rate." A Google search for that phrase yields thousands of results, beginning with corporate-funded conservative outlets like the Heritage Foundation, the American Enterprise Institute (AEI), the Cato Institute (formerly named the Koch Foundation), the Heartland Institute... Here's a good one for the old-timers: "The Laffer Center" at the Pacific Research Institute.
Unfortunately, you also see this corporate-conservative propaganda line coming out of the Obama administration.
Corporate Tax Rates Used To Be Much Higher
The top corporate tax rate used to be 52.8 percent of profits after costs, salaries, expenses and various tax breaks are deducted. Then it was lowered to 48 percent. Then 46 percent. Now it is only 35 percent. This is a decrease of more than 30 percent in rates.
How did corporate tax rates get lowered from over 50 percent down to 35 percent? Corporations argued that these rates were "not competitive" and corporations and investment would move from the U.S. if they were not lowered. So we lowered the rates. Does that sound familiar?
Then the corporations went from country to country, using the same argument and making the same threats. Country after country lowered their rates to remain "competitive." And now, after a round of this, the giant corporations are back, making the same threats. If we lower rates they will go from country to country again, making the same threats, until there are no corporate taxes.
The Falling Corporate Share Of The "Tax Burden"
Because of these cuts the share of federal revenue (the "tax burden") that comes from corporate taxes has fallen from around 32 percent in 1952 to around 8.9 percent now. As a share of gross domestic product (GDP) it has fallen from about 6 percent of GDP then to less than 2 percent now.
When corporate taxes are cut the rest of us have to make up the difference – usually through cuts in the things government does to make our lives better like maintaining our infrastructure, funding education, funding basic scientific research, etc. This includes smaller domestic companies that don’t have armies of tax consultants. Cutting taxes on the corporate giants hurts our country's smaller "main street" businesses and places them at an ongoing competitive disadvantage.
So What If Rates Are Higher?
Even if corporate tax rates are higher here than in other countries, so what? Corporations here get a lot from us and should contribute a fair share of the return on out investment in their prosperity. Corporations are simply legal structures – creations of our government, We the People. We created them to serve us, not to serve a few already-wealthy people at our expense.
Corporate taxes do not hurt economic growth. Thomas L. Hungerford writes at EPI, in "Corporate tax rates and economic growth since 1947," that, "The current U.S. corporate tax rate does not appear to be impeding corporate profits. Both before-tax and after-tax corporate profits as a percentage of national income are at post–World War II highs; they were 13.6 percent and 11.4 percent, respectively, in 2012."
Specifically and importantly, Hungerford points out that the corporate tax rate does not affect our economic growth, "Lowering the corporate income-tax rate would not spur economic growth. The analysis finds no evidence that high corporate tax rates have a negative impact on economic growth (i.e., it finds no evidence that changes in either the statutory corporate tax rate or the effective marginal tax rate on capital income are correlated with economic growth)."
Hungerford includes a chart showing that U.S. GDP growth actually decreases as corporate tax rates decrease. He does not assert a causation, but the country has been forced to reduce spending on infrastructure, education, research, and other things that improve long-term economic growth because of cuts in taxes on the wealthy and corporations.
Who Owns Stocks?
Here is the reality: When we talk about corporate taxes were are talking about certain people, not just anonymous corporate entities. Representatives of the 1 percent like to argue that all of us own corporate stock in "our" 401k accounts, retirement accounts, mutual funds and pensions. Right, like so many of us have 401ks, pensions and well-filled retirement accounts. I mean, really. Here is who owns corporate stock:
In 2007 the "bottom" 90 percent of us owned 9.35 percent of all corporate stock. The top 10 percent owned the rest. Income and wealth have concentrated upward since then, with all economic gains from the recovery going to the top few -- so it's worse now.
Robert Frank talked about this back in 2013 at CNBC, in "Why the Wealthiest Benefit Most From Dow 14,000":
According to the Federal Reserve, the wealthiest one percent of Americans own 52 percent of all directly owned, publicly traded stocks in the United States. The top 5 percent own 82 percent of directly held stocks. … And roughly half of Americans own some stocks through mutual funds and pension funds.
… But only about a third of all Americans hold more than $10,000 in stock, according to a report from the Economic Policy Institute. So while more Americans hold stock, they don't hold much.
Here are some numbers from the post "Why You Shouldn’t Be “Optimistic” About Corporate 'Tax Reform'"
- Corporate profits are the highest ever.
- The corporate tax portion of federal revenue dropped from around 32 percent in 1952 to around 8.9 percent now.
- Corporate taxes have fallen from about 6 percent of GDP then to less than 2 percent now.
- Corporate taxes used to be 52.8 percent, then 48 percent then 46 percent. Then we did “tax reform” and lowered that to 35 percent.
- Corporations are holding around $2 trillion “outside of the country” to dodge taxes. That represents up to $700 trillion in taxes owed.
- Corporations “strip income” by having a non-U.S. affiliate “loan” money to a U.S.-based affiliate. The interest is deductible from U.S. income so taxes are lower.
- As of 2007, the top 1 percent owned 50.9 percent of all stocks, bonds, and mutual fund assets. The top 10 percent owned 90.3 percent. The bottom 50 percent owned 0.5 percent. Things have concentrated upward since then, with all economic gains from the recovery going to the top few.
Yes, We Do Need Corporate Tax Reform
In fact the country really does need to reform the corporate tax structure! We need to eliminate the loopholes that let the giant multinational corporations hide profits outside of the country. We need to collect the up-to-$700 billion of taxes already owed us on already-booked profits held outside the country. We need to eliminate loopholes that encourage companies to move jobs, factories, call centers, research facilities and key resources out of the country.
And mostly we need to return the top corporate tax rate to 50 percent. Corporations are entirely creations of law and government. We should not let a few already-wealthy people reap the entire return from We the People's mutual investment in education, infrastructure, research and other things that We the People provide to enable these companies to prosper. Increasing the corporate tax rate will help restore the funding to these, to prepare our country to compete in the 21st century economy.
Increasing corporate tax rates will also help reduce inequality, because the top few are the primary beneficiaries of corporate tax cuts. It will help fund our government in its effort to do things that improve the lives of We the People and not just the already-wealthy.