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Corporate Taxes

Posted November 25th, 2012 at 03:05 PM by Mancipium ut pudor
Updated November 25th, 2012 at 06:17 PM by Mancipium ut pudor

Imagine a college student. He had worked exhaustively for the past four years in order to graduate. The courses and challenges of college had been difficult, but the individual endeavored onward, investing immense amounts of time and money into the final goal of achieving a degree. Finally, the student, passing hurdle after hurdle, graduates. The person then sets to searching for a job which will not only pay the bills but also employ the degree he laboriously earned, but opportunities dry up and any openings seem to disappear quickly. As the unemployed graduate grows more desperate, he finally finds a low-level job outside his field, but it at least pays for his expenses. Now as his college loans start accumulating interest, the bewildered student wonders just where the good jobs he had been preparing for went to.
This is just an example of a common problem pervasive throughout America today. The economy and job market have stagnated to the point where one of every two college graduates are unemployed “Chew”. Debt continues to grow upwards while the job market shrinks, and businesses do not have the means to continue steady expansion. This weak economy is the result of the economic recession, and, while there are many factors and variables involved in the study of the recession economy, a facet particularly pertinent to the business community and job seekers is the issue of corporate taxes. While the effect of taxation is itself a large complex issue, we can gain a greater understanding of the whole by studying one of the parts. The part that I will focus on is the negative effect of the current USA corporate tax rate on firms and corporations, and why it should be lowered.
First, before we analyze this toll, it would be profitable to define exactly what I mean by corporate taxes. Corporate taxes are “A levy placed on the profit of a firm, with different rates used for different levels of profits. Corporate taxes are taxes against profits earned by businesses during a given taxable period; “(“ (Investopedia)”) In approximation, it is a tax placed on the earnings of businesses. By knowing what exactly corporate taxes are, we can now properly weigh it’s effects, and why it should be lowered.
Now, in a time when the deficit is at an all time high, people having less money to spend, and jobs scarce, many people might wonder at the logic of lowering the tax rate for businesses, but the fact is this is the right time to cut the rate. As of 2012, the United States of America achieved an effective corporate tax rate of 34.6%,the highest rate in the G7 (the economic planning council) and the the fourth highest rate in the world. While other industrialized nations have intitated corporate tax cuts for their countries, America continues to have a rate double that of the national average and well above that of other industrialized nations. (Institute) This has several effects on businesses. Most important is that it destroys the competitive viability of America. Firms and corporations with the means naturally seek lower tax havens, taking their jobs with them.The Examiner magazine said this, “ In an expose on March 27th by CBS's 60 Minutes, hundreds of companies, and over $1.1 trillion dollars, are now being kept overseas providing nothing to the US economy due to stringent tax laws and regulations which make it difficult to invest, create new jobs, and find profitability if incorporated in America.” (Kenneth Schortgen Jr)
Likewise, the jobs that could be given to American families should be reason enough for alleviating the tax burden. Yet, there are those that purport that these statistics are false or misleading. Democracy in America, a popular political blog, has stated “Members of the business community, for their part, have long maintained that America's corporate rate, nominally the highest in the world, should be lowered. But that 35 percent rate is more theory than practice. Studies indicate that after tax breaks, the effective corporate tax rate is in fact closer to 25 percent, and one analysis found that nearly 300 major companies paid an average rate of just 18.5 percent between 2008 and 2010.” (R.M.) When reading this, it is important to note that it is true that some of these corporations do pay less than the effective rate, but there is a fallacy apparent in the logic. The article doesn’t go deep enough into the problem. Where did the companies get these tax breaks? They received them by relocating and off-shoring to areas with a more profitable tax rate, which the corporations had to do to avoid the excessive corporate tax in the first place. An example of this would be the tech giant Apple, who built factories in Ireland, routs internet traffic through Luxembourg, and then banks the profits in the Netherlands. All these operations create jobs for these nations, and the reason for this overly complicated trek is that each of these countries has tax laws vastly lower than America’s. In addition, while a select few firms can offshore, other companies cannot afford these loopholes, and the largest percent of taxes fall upon them hardest. (Prante) It is much like the family business or local firm that provides an infrastructure for an area. These small based businesses simply do not have the contacts or resources to relocate to these tax havens, and they must then compete with businesses that have. This presents the dual problems of a foreign based corporate system and also an imbalanced domestic market. An easy solution to both these problems is to lower the tax rate to a value where it is more attractive and profitable to keep their operations in the US. It would
Similarly, a common charge brought up against the idea of reducing the rate is that the government cannot afford to lose the revenue. These detractors claim that tax cuts do not actually spur on growth, and thereby the government would lose a source of income for no reason. The problem in this is those opposed to the tax cuts make two incorrect assumptions. One, tax cuts do in fact spurs growth. There are numerous historical examples of this very thing occurring. In 1981, the USA had an unemployment rate of 7.5% and corporate tax rate of 46%. After the corporate tax was cut down to 35% by the Reagan Administration, the national unemployment rate fell to 5.0%. These statistics show an enormous growth in employment. Knowing that tax cuts of this kind can spur growth actually solves the second misconception. With the increased growth spurred by the tax cuts, government would actually bring in more income than at higher rates, because it would be getting slightly less from an economic base that is constantly growing, resulting in more income overall. This idea is illustrated handily by an economic model called the Laffer Curve. Created by the economic advisor Arthur Laffer, the Laffer Curve shows a relationship between tax rate and tax revenue. According to the Cato institute, “The Laffer curve illustrates the idea that above a certain tax rate, cuts to the rate cause the tax base to expand sufficiently for revenues to increase. The U.S. corporate tax rate is above that rate, and thus in a strong Laffer zone.” (Edwards) The Laffer Curve is also handily shown true in real world examples. In 1985, Ireland had a corporate tax rate of 50%, but their overall corporate tax revenue was only 1% of their Gross Domestic Product. Over the next nineteen years the Irish government underwent a series of reforms that lowered the rate down to 12%, and coincidentally the corporate revenue skyrocketed to 3.6% .This is an increase of roughly 300%. What we see in these examples is basically the ideal Laffer Curve effect. Although, with this diagram in mind, it is important to note that not all tax cuts have this dramatic of an effect. In order to be most effective, corporate tax reductions must be employed in proper areas and are only one piece of an economic plan. But, as these examples and models show, the use of tax cuts is a powerful positive economic stimulus.
With all these facts, statistics, and arguments, it all boils down to one simple question. What does it matter? Perhaps economics and politics do have some meaning, but is it truly worth wasting time thinking about it? The answer is yes. We could ask that same question to our College graduate locked in a spiral of debt. Perhaps one of the companies that were forced to offshore might have had a job for him. Maybe he could have found employment with a local business, except that businesses are not hiring because they have to deal with an unfair tax system and ambiguous competition. If you could ask this individual or countless other unemployed people, I think they would tell you anything affecting business is of the utmost importance to them.
On the other hand, one could even expand the observation further. What about the family and relationships of this graduated individual? The only job he can find is one that only just fulfills his needs. It definitely doesn’t leave any left over to stop his college debt from accumulating interest. The stress of his situation taints many varied areas of his life, from his self-image to his relationships. He would feel stuck in this cycle. Alternatively, it might be imagined that the graduate could move to get one of the few jobs out there. While this scenario is much better than being unemployed, it also strains any relationships he might have had, and it removes any developed structure for the newly employed to lean upon. These symptoms of extended unemployment and desperate employment cause not only economic disturbance but also psychological tension.
Understanding all the evidence presented hitherto, one can see the damage done by the inefficient and detrimental corporate tax system. Jobs, profits, revenues, economic security, and growth, all these items are endangered for everyone by an economic policy that discourages internal and external competition. Hopefully, the American policy will soon swing to support a stronger pro-business stance, because it would be a senseless shame if the American people continued under the misconception that corporate tax cuts are the problem, when in fact they are part of the solution.

Works Cited

Chew, Kristina. 1 in 2 College Graduates Unemployed or Underemployed. Ed. inc. Care2.com. 22 April 2012. Web. 23 November 2012.
Edwards, Chris. Coporate tax laffer curve. November 2007. Cato Institute. Web. 23 November 2012.
Institute, Cato. New Estimates of Effective Corporate tax Rates on Business Investment. na February 2011. Cato Institute. Web. 23 November 2012.
Investopedia. Corporate Tax. n.a. ValueClick, Inc. Web. 23 November 2012.
Kenneth Schortgen Jr. US corporate tax rates the primary cause for companies moving overseas. 11 March 2011. Clarity Digital Group LLC d/b/a Examiner.com. Web. 23 November 2012.
Prante, Drs. Robert Carroll and Gerald Ernst & Young LLP. Long-run macroeconomic impact of increasing tax rates on high income taxpayers in 2013. na July 2012. Ernst & Young. Web. 23 November 2012.
R.M. The trouble with tax reform. 4 Febuary 2011. The Economist. Web. 23 November 2012.

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  1. Old Comment
    Mancipium ut pudor's Avatar
    Hello all,
    This is a research paper I wrote awhile back. I was wondering if any of my peers here at the forum wouldn't mind giving me their opinions.
    Posted November 25th, 2012 at 03:54 PM by Mancipium ut pudor Mancipium ut pudor is offline
  2. Old Comment
    Baltis's Avatar
    I think there is an awful lot of political rhetoric and false assumption involved. First, the very idea that serious businessmen consider tax rates when making investment and hiring decisions is ludicrous. These decisions are driven by demand. Demand comes from consumers having sufficient resources and desire to purchase the products the company sells.

    We do have a problem with Corporate tax rates being too high. The problem actually develops from various countries creating themselves as tax havens. The trick isn't to actually do business in a tax haven, simply do enough paper to make it seem that way. Our executives don't actually work and live in Bermuda. They just go there once in a while for a quick director's meeting and round of golf. The end result is that, yes, we need to maintain competitive rates and end regulations that are overly generous in allowing offshore havens.

    Corporate tax rates have very little to do with closely-held or family owned corporations. As such, a business would elect to avoid double taxation of dividends by going Sub "S". This takes corporate tax rates completely out of the equation.

    However, not all corporate tax breaks come from playing the offshore game. Huge corporate giveaways also include the Domestic Production Activities Deduction and Percentage Depletion. Bonus depreciation caused huge reductions in corporate tax rates.

    When a public corporation says it paid 18.5% rate on its income, that income measurement is via Generally accepted accounting principles. When that same income was measured using Tax accounting principles, the rate is actually 35%.

    In my opinion, your sources seem tainted by political agenda and bias toward one's own point. In other words, more like advocacy than balanced research.
    Posted November 25th, 2012 at 06:21 PM by Baltis Baltis is offline
    Updated November 26th, 2012 at 04:20 AM by Baltis
  3. Old Comment
    Mancipium ut pudor's Avatar
    Thanks so much Baltis for your critique. I appreciate the viewpoint of an expert. What are some better sources that you could suggest? Also, (while this doesn't negate your previous statements) I just wanted to make a correction that this was meant as a argumentative paper for the class, so it was meant as a slight advocacy, but I still see your point.
    Posted November 26th, 2012 at 12:12 PM by Mancipium ut pudor Mancipium ut pudor is offline
  4. Old Comment
    Baltis's Avatar
    I noticed this quote from an editorial in the Austin American Statesman yesterday. I think its germain to the discussion:

    "since the election of Ronald Reagan, supply-side economics - in brief, the belief that lower tax rates, particularly on upper earners, will increase incentives to produce things, resulting in eonomic growth that benefits everyone - has been the doctrine of the Republican Party. The Wall street Journal editorial page has become a reflexive cheerleading squad for supply-sidism, while powerful groups like the Club for Growth and Americans for Tax Reform have policed party ranks for deviations from the approved theology.

    The adherence to supply-side theory has come despite, rather than because of, real world results. Much of the Reagan-era prosperity attibuted thereto was really the result of Keynesianism that dared not speak its name. That category includes the big, deficit-financed defence buildup and income tax cuts that boosted consumer spending.

    Meanwhile, the last three decades have proved key supply-side tenets crashingly wrong. Chief among them is the assertion that lower marginal income tax rates for upper earners are an essential catalyst for growth.

    Another is the related warning that tax increases on the well-to-do will inevitably cause eoconmic calamity.

    Further, no credible economist still takes seriously the notion that income tax cuts will spark enough growth to pay for themselves. That idea has become so discredited that most GOP candidates no longer make the claim openly, yet its influence is still evidant in the unrealistic growth assumptions that undergrid GOP economic proposals - and in many conservatives refusal to acknowledge how much the Bush-era tax cuts have contributed to our fiscal mess.

    Supply-siders could once build their conceptual castles in the air and hope the average person would be swept away by the magical mystery of it all.

    But voters now have two test periods for easy comparison: The Clinton years whose impressive prosperity defied supply-side predictions, and the George W. Bush era, when the economic recovery underperformed other post-war comebacks."

    I realize fully that this quote also comes from an advocates point of view. A lot of politics involved. However, there is some very harsh reality in play. The relationship between tax rates and jobs. = not really there for the supply side.

    History also tells us that government cutbacks in the face of recession simply make the situation worse. Our two greatest depressions (late 1830s and early 1930s) were both reacted to with deep spending cuts. Results were disaster. When the financial markets froze in 2008, the nation's economists came together and gave us the message of bailouts and stimulus. This time, we met the crisis with increased social spending to help maintain consumer demand. We did use tax cuts. Mostly for the little guy to, once again, stimulate consumer demand. We saved AIG, the banks, the auto industry with bailouts. Our results, despite the claims of the GOP in their recent attempt to regain power, have been some of the best in the world. As we know, Europe has experienced the same financial difficulties we have. They responded with austerity and cuts. They have been in recession for some time now. Britain's austerity brought recession while the US's stimulus and bailouts brought some measure of growth. Perhaps not enough to suit everyone but pretty much leading the way. Despite the level of debt, the world's reliance on the US economy and the dollar remain very strong. To include demand for US bonds.

    To point out a little bit more on business and tax policy. Management works to increase revenues and operating profits. Labor is held to the minimum necessary (sort of, in theory anyway) needed to produce the revenues. Now, what happens after expenses are removed from revenue is called 'operating income'. This is management's focus. The company then employs tax accountants, etc that work to calculate the income tax on that operating income. They will refigure certain expenses, add certain deducts, etc and then apply tax rates to the result. This is not really the focus of management. It is important but not what drives decisions such as labor requirements. Those decisions are above the line in operations and are dependent upon demand and the company's revenue growth outlook. Very simplified but still goes to demonstrate that job growth and corporate income tax rates have very little relationship.
    Posted November 27th, 2012 at 09:55 AM by Baltis Baltis is offline
    Updated November 27th, 2012 at 10:02 AM by Baltis
  5. Old Comment
    Baltis's Avatar
    Couple more thoughts as I read your article again. (itself something of a compliment, IMO) At one point the corporate tax rate is noted at 34.6% yet later the actual effective rate per analyst is only 18%. I pointed to a few of the relevant items in the first post being accelerated depreciation, tax credits for favored activities, domestic production deduction, depletion, intangible drilling costs, Research and development write-offs, and a few others. These items all work against the tax rates. So, the question becomes, do you favor keeping the domestic production activities deduction or would you prefer to lower tax rates by a corresponding amount of revenue. There has been much debate on this in recent years. Problem is, some companies or industries come out better one way, and others come out better the other way. For instance, a large bank would rather see lower top rates than maintaining the depletion deduction. Exxon would not agree.

    You point to 1.1 Trillion dollars maintained overseas by US companies determined not to bring the money home until they can get the rate lowered on foreign dividends from subsidiaries. Yes, that is true. Various suggestions have been made that range from one-time lowered rate to get some of it in the US to overhaul of the US system of International taxation. (basically, we use a tax credit system while many other companies use a jurisdictional approach of allocating income.) In any event, I have not heard all the details regarding why we do or don't go ahead and do something with that 1.1 trillion. Which, by the way, is a result of our system built up over many decades. Not something new. One interesting suggestion has been to let any of them bring amounts back to the US tax free if they use the money to create investment here in the states. I don't know the status of any of the various ideas.

    Very high corporate rates can be a drag. After all, the 46% rate from the 70s was conceded to be too high by most economists. The drop from 35% to 25% might not be so significant. Reason being that reinvestment was hindered at 46% but the already lowered rate to 35% allows for most of the reinvestment necessary to get good revenue growth. Does lowering rates further get more cash reserves or does it actually bring even greater reinvestment? Good debate although, like most economic debates, the truth is always in the middle and never in either extreme. Tax rates are a good example. We don't get the same results dropping to 25% from 35%% as we did dropping to 35% from 46%. There are obviously some diminishing returns. Not a drop dead point. diminishing returns.

    The article credits Reagan tax cuts with being the sole cause of a drop in unemployment rate to 5%. Not sure that is the only item in town. Government spending increased (particularly in defense) and deficits grew. Perhaps what is actually shown by the 2.5% drop in unemployment was that short-term government deficit spending can be a wonderful thing. Reagan and his team realized the deficits could not be sustained and brought the 1986 tax increases upon the public. Horrible impact upon the real estate market that year. I remember it well, October 22, 1986, the day passive loss limitations went into effect. The day the rental property died.

    The Irish tax revenue increase is an aberration caused by them making themselves an offshore tax haven and taking advantage of the various international tax law problems faced by tax regimens of both types. (jurisdictional or tax credit based). Ireland makes a very poor example for a Laffer curve analysis. In fact, I don't think many economists are particularly excited about the Laffer curve relationship. It is not accepted that a lowering of rates creates enough growth to replace itself in terms of overall revenue.
    Although, to be fair, and a little bit scarcastic, politicians seem to be in love with the Laffer Curve analysis.

    Tax rates don't take jobs overseas. However, labor costs do. Can't always be helped but the shift of jobs overseas that we see in the US is attributable to lower manufacturing and labor costs available elsewhere. Rarely do I think it comes from tax rates. On the other hand, I'm sure I should never say never. Once again, we are discussing economics. In my opinion, nothing is ever absolutely correct in economics. Extreme adherence to theory rarely has good effect. I don't wish to sound overly political by using Obama's phrase but, I guess I will in this case. A balanced approach to economic affairs is generally best.

    Its difficult to find the proper balance between tax rates, tax revenues, government spending, and economic growth. Small deficits promote growth. Government debt promotes growth and has brought us many great things throughout history. Alexander Hamilton was right about that. It can be a blessing. But, can also be a curse. Large deficit spending is viewed as recessionary. finding the balance is tough. We thought we had it in the 90s but created a government surplus. Good thing, right? Turns out that a surplus can also be a bit recessionary in nature. huh, who would think it?
    Posted November 27th, 2012 at 11:45 AM by Baltis Baltis is offline

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