TAX REFORM: Retreating from a Corporate Rate of 20% Is a Bad Idea

By at 12 December, 2017, 11:53 am

Tax reform must aim to make tax rates as competitive as possible, and that includes the corporate tax rate. The proposed 20% tax rate passed in both the Senate and House tax plans would make our corporate rate globally competitive.

by Raymond J. Keating-

One of the most significant step being taken in both the U.S. Senate and House of Representative’s tax plans is reducing the corporate income tax rate from 35 percent – second highest on the planet, as noted in an SBE Council report – to 20 percent.

The benefits of such a substantial tax rate reduction would be multiple, including enhancing returns from and incentivizing starting up, investing in and expanding businesses; vastly improving U.S. international competitiveness; and boosting gains in innovation, efficiency, worker productivity and worker compensation thanks, again, to the improved incentives for investment.

For good measure, reducing the corporate income tax rate is not simply a big business issue. To the contrary, when one considers the make-up of C-corporations in the United States, a lower corporate income tax rate overwhelmingly is about relief for small businesses, as 86 percent of C-Corp employer firms have less than 20 employees; 96.7 percent less than 100 workers; and 99.1 percent fewer than 500 workers.

As negotiations proceed in trying to hammer out the differences between the House and Senate tax plans, there have been reports on the possibility of pushing the corporate tax rate up higher than 20 percent – to 21 percent or 22 percent. Any such retreat from getting the corporate tax rate down to 20 percent should be resisted.

This issue, and quite frankly most others in the current debate, is being viewed through the wrong prism. Much of the media, assorted big government interest groups, and too many Members of Congress focus on the impact that tax changes have on federal government revenues. That is, how much will the federal government lose? That turns the entire government and tax equation upside down. The proper focus should be on reducing how much government is draining from the private sector, that is, work should zero in on providing tax relief that leaves more resources in the private sector with those who earned the money, and enhancing pro-growth incentives for working, saving, investing, and starting up and building businesses.

An analysis by the Tax Foundation reported, “Moreover, we estimate that while the static cost of the 20 percent corporate would be $1.48 trillion over a decade, the economic growth would generate enough new tax revenues to reduce that cost to $718 billion. By contrast, moving to a 21 or 22 percent corporate rate would mean a smaller revenue loss, in both static and dynamic terms, than the 20 percent rate.” But here’s, by far, the most important point: Reducing the corporate tax rate to 21 percent or 22 percent rather than 20 percent generates “less economic growth, along with fewer jobs and smaller wage growth.”

As further noted in the analysis: “For example, a 22 percent corporate rate would increase the long-term level of GDP by 2.4 percent, 0.3 percentage points less than the 20 percent rate. While seemingly a small reduction in the amount of growth, it would create 60,000 fewer jobs and do less to boost family incomes.  The capital investment and productivity growth generated by a 20 percent corporate rate would boost the after-tax income of a family earning $50,000 by $1,550, while a 22 percent rate would result in a $1,400 increase in after-tax incomes.”

House and Senate conferees have a difficult political balancing act, especially considering the Senate’s ridiculous budget rules. But the primary focus when changing the way corporations are taxed must be, first and foremost, on sound economics, not misguided politics. Sound economics dictates driving income tax rates down as low as possible. For those worried about budget deficits, here’s a thought: Deal with government spending, which is the ultimate problem when it comes to both government taxes and borrowing.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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