By Bill Bischoff
It was gratifying to see lots of reaction to my earlier post about why we should drastically cut the U.S. corporate income tax rate to somewhere in the 15% to 20% range from its current rate of 35%. However, several readers had trouble understanding how such a cut would help bring business and jobs back to the U.S, since few domestic corporations actually pay the advertised 35% rate, anyway. So let me clarify.
Perhaps the biggest reason why many large corporations pay far less than the advertised 35% rate is because they have moved profit-making operations to low-tax offshore jurisdictions. As I explained in my earlier post, U.S. companies don’t owe corporate taxes as long as the profits from those offshore operations aren’t brought back to the U.S.
Say a U.S. company makes all of its profits in a foreign country with a 15% tax rate, and reinvests all of those profits in that country. The company thus pays the 15% tax to the foreign country and pays zero to the U.S. Treasury. The company’s financial statements will show an “effective tax rate” of 15% rather than the advertised 35% rate that U.S. companies theoretically must pay. In fact, this company’s “effective U.S. tax rate” is 0%.
I’m convinced that if we lowered the U.S. corporate tax rate to 15%, lots of companies would choose to locate more profit-making operations, and more jobs, in this country—even with the higher cost of labor in the U.S. Though the effective tax rate would be just 15%, those taxes would be paid to the U.S. Treasury instead of to some foreign country. Unless I’m missing something, that would increase U.S corporate tax collections. What’s more, the additional jobs created in this country would result in higher personal tax collections. This is a classic illustration of why sometimes “less is more.”
Don’t get me wrong. I’m not in favor of drastically reducing the corporate tax rate without, at the same time, getting rid of ridiculous business tax breaks. For example, we currently have a so-called domestic manufacturers’ deduction that was intended to spur job creation by U.S. manufacturing companies. This is a classic example of Congress attempting to micromanage the economy by creating a “targeted tax break.” Like many other targeted tax breaks, this one didn’t work very well. Wouldn’t it be much smarter to simply lower the tax rate for all companies and let the economy sort out the winners and losers?
Readers, what do you think?