Written by Dan Lieberman, Alternativeinsight

The Trump administration and its lower tax advocates have not provided adequate analyses and proofs to validate their opinions. Proponents of lower corporate taxes, who claim it will make corporations more productive and escalate production activity, may find their proposals do not automatically make corporations more competitive and benefit the economy less than equivalent government spending.

Rather than catering to corporate sponsors, the administration should ascertain the optimum corporate tax and propose a tax rate that most advances the economy for the benefit of all Americans. Three posited advantages in lowering corporate tax rate:

  • Increased funds for investment translates into increased production, increased employment, and increased Gross Domestic Product (GDP).
  • Increased after-tax profits allow corporations to improve competitiveness by additional spending on research and development, marketing, productivity incentives and use of other measures — lowering prices and rewarding workers.
  • High tax rates drive corporations to nations that have low tax rates and punish workers in the high tax nation.
  • Start with some facts.

    The first following graph shows that the maximum corporate tax rate, 35 percent for income greater than $18.3 million, has been much higher in previous decades, and the nation has prospered. The rate has been relatively constant for the last 32 years, and the economic gyrations have not shown any relation to that rate.

    The second graph above graph tells a partial story — corporations have taken advantage of tax breaks and loopholes to reduce their taxes. The major problem is not high corporate tax; the major problem is the ability of many corporations to avoid paying taxes. If tax breaks and loopholes unique to U.S. corporations, such as accelerated depreciation, using excess tax benefits from stock options to reduce federal and state taxes, and industry-specific tax breaks were reduced or eliminated, the tax rate could also be reduced; the government charges with one legislation and discharges with another legislation.

    Corporations are responsible for finding loopholes to avoid taxes, but the government is responsible for providing the loopholes. Those paying no tax are not complaining; those paying a 20 percent tax might register slight complaints, and those paying more than 20 percent deserve to complain, not about their high tax rate, but to the corporations that manage to pay little tax and to the government for not minimizing the tax breaks and for not closing loopholes.

    With those thoughts as an introduction, examine the posited advantages of lowering the corporate tax.

    1.  Increased funds for investment translate into increased production, increased employment, and increased Gross Domestic Product.

    This is all true if corporations used the greater part of their profit for increased investment. However, they use much of the profit for executive bonuses, stock buybacks, corporate takeovers, and to retain earnings.

    Goldman Sachs estimates S&P 500 companies will spend $780 billion on stock buybacks in 2017. In 2004, Congress enacted a one-year repatriation tax holiday that lowered to 5.25 percent the rate that corporations would pay to return deferred foreign income and expected that the repatriated funds would increase employment and investment in the U.S. economy.

    The Center for American Progress claims: “Economic researchers found that the tax holiday had no effect on employment or investment. In the end, corporations that repatriated profits just used that money for dividends and other payouts to investors.”

    One reason for corporate taxes is to do for the corporate world what income taxes do for the public — redistribute the wealth from those who have to those who need. By taxing corporations, the federal government takes surplus profits from corporations and, directly or indirectly, purchases goods that allow other corporations to be profitable.

    Go through the numbers and, over sufficient time of tax and spend, the original taxed profits reappear in the system.  Because sufficient purchasing power to purchase all the goods and services in the economy never exists (and credit, which grows and grows and grows, is necessary to alleviate the shortfall), the corporate tax alleviates the shortfall without introducing additional credit.

    Left out of the corporate books is responsibility to support infrastructure – transportation, communication, utilities – government research, government loans, credit guarantees, bailouts, assistance to education, job training, subsidies, and other programs that benefit corporations. Shouldn’t corporations repay a fair share of the financial assistance that guarantees their prosperity?

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