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How Lower Corporate Tax Rates Boost Business

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?

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    • I stronglly agree with a lower corp tax and that is what we are doing in Canada.
      I live in Montreal the most socialist place in North America (where the gov’t spends way to much) were we pay much lower corporate taxes but much higher personal income tax and gas taxes and sales taxes. Lower corporate taxes up north cause the US gov’t to look carefully at any transfer pricing between affiliated companies in Canada and the USA for obvious reasons. A higher gas tax would encourage conservation and lower your trade deficit (not good for us as your largest supplier of oil) and a national sales tax is probably neaded to reduce the deficit. Good luck in getting this through congress even if it is the right thing to do.

    • A full elimination of the US Corporate Income Tax should be at the top of the agenda. The tax will only bring in $300b in 2011 and if erased, companies would have an extra $300b annually in cash flow to invest in their business or distribute to shareholders. Plus they hold over $1 trillion overseas that they will repatriate to the US for investment or distribution. The elimination will also cause a $4.5 trillion dollar lift in the value of US equities (+25%) which would not only help business, investor and consumer confidence, but it will also greatly assist our nation’s significant underfunded pension issue at the States, Munis and Corporations. This idea is a win, win for everyone as it will create millions of jobs in the US immediately and save the retirement plan of the public school teacher in Colorado. It is the single best idea on the drawing board that pays for itself.
      http://www.EliminateCorporateIncomeTax.com

    • We should have ZERO corporate tax for 20 years on any new manufacturing plant in the USA. Build it here and keep your profits. Politicians are ignorant of economics or just do not care about unemployed workers. If voters keep choosing tax, spend and regulate politicians they will lose their prosperity.

    • Large company’s are going to make their money 1 of 2 ways. With you or without you. Its time the government figures this out. We are in a global market place now and the U.S. is falling behind and its only going to get worse if changes are not made. You really don’t have to be a economist to figure this out. Greed drives us all in some form. The more money we can keep in our pockets for the had work we do is the way we will go.

    • Sounds good to me. Anything to get employment levels back up. Libs will absolutely hate this idea.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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