Commentary: The recently announced Republican sponsored tax plan calls for reducing corporate income tax rate from 39% to 20%. This rate cut is the single most costly provision of the tax proposal, and for this reason, has become a lightning rod for critics of the tax proposal. But while many are critical of the provision as being too generous to corporations, I argue that it doesn’t go far enough. We should repeal the corporate income tax outright. Just get rid of it.
The reason is to drain the swamp. The corporate tax code is a Swiss cheese of loopholes and special provisions, each of which is associated with a lobbyists dedicated to preserving a bene for someone paying a fee. The corporate tax code, as it now exists, could be renamed the Lobbyist Full Employment Act. All over Washington, swamp creatures are scurrying about seeking special provisions for their clients.
One of the arguments made by Democrats and other opponents of the Republic sponsored corporate tax cut is that the effective average tax rate is not the statutory 39%, but only 29%. This difference between the statutory and effective rate can be thought of as a measure of the effectiveness of lobbyists and is not an argument against lowering rates, but precisely why we should go farther.
As things stand now, American corporations are heavily taxed. Our statutory rate is the highest in the world, while are effective average rate is third highest. Such high rates does distort corporate decision making. In recent years, tax inversion, the practice of relocating headquarters in a foreign jurisdiction to avoid taxes, has become more common. Under the Republican plan, the statutory rate would be dropped to third lowest among major countries, ahead of the UK and Germany.
Exactly who pays the corporate income tax ultimately depends on the interaction of supply and demand and differs by industry and even among firms within an industry. Some of the tax is passed on to consumers, some is covered by lower salaries paid employees, and some of it comes out of dividends, so is paid by shareholders.
Certainly, many shareholders are wealthy individuals, and cutting the corporate income tax will benefit them. But many other shareholders are the proverbial widows and children, often owning the shares via a mutual fund. And here is the rub with a corporate income tax: it is less fair than a direct income tax on individuals.
So, I would pay for elimination of the corporate income tax by increasing the top tax rate sufficiently to make up for the lost revenue. About 9% of federal tax revenue comes from the corporate income tax, so the increase in taxes paid by the wealth tax payers would be substantial.
Washington swamp is pretty big. Lobbyists earned $3.2 billion last year, down slightly from the year before, but still a lot. We don’t know how much of that lobbying was aimed at the tax code, but a substantial amount.
Neither the Democrats nor the Republicans want to drain the swamp, as lobbyists are the source of their political mother’s milk—money. The corporate income tax isn’t likely to go anywhere soon.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He owns stock only via mutual funds. The opinions expressed may not be shared by the regents or administration of NMSU. Chris can be reached at chrerick@nmsu.edu.