Corporate Tax Rate & Jobs
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Does Lowering the Federal Corporate Income Tax Rate Create Jobs?
Corporate Tax Rate & Jobs
The creation of the federal corporate income tax occurred in 1909, when the uniform rate was 1% for all business income above $5,000. Since then the rate has increased to as high as 52.8% in 1969, and the single rate has become eight different rates for different income levels. Today's rate for companies with over $18.3 million in income (the top category) is 35%. Throughout US corporate tax history, Americans have debated whether or not lowering the rate results in job creation.

Proponents of lowering the corporate tax rate to create jobs argue that it incentivizes job creation in the United States instead of overseas, encourages increased investment in research and infrastructure, and passes savings on to consumers through lower prices. They say that the United States already has the highest corporate income tax rates in the world, which creates a competitive disadvantage for US businesses.

Opponents of lowering the corporate tax rate to create jobs argue that it results in more profits for corporations without affecting job creation, and that unemployment rates were the lowest in recorded US history during the time when corporate income tax rates were highest. They say that lowering the rate would increase the US deficit, and that companies hire employees based on need, not because of corporate tax rates. Read more...
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Corporate Tax Rate & Jobs ProCon.org is a nonpartisan, nonprofit website that presents research, studies, and pro and con statements on whether lowering the federal corporate income tax rate results in job creation.
Did You Know?
  1. Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a federal corporate tax rate of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%. [1]

  2. At 35%, the United States had the highest federal corporate income tax rate of any OECD country in 2012, and at 29.2% it had the OECD's fourth highest effective corporate tax rate in 2011, behind Germany, Italy, and Japan. [2][44]

  3. The federal government has collected a corporate income tax since 1909, when the rate was 1% for all business income above $5,000. [3]

  4. The corporate income tax rate reached 52.8% from 1968-1969, the highest in US history. [3] The unemployment rate during these years was 3.6% and 3.5% respectively. [4]

  5. From 1940 to 1942, Congress passed four separate Revenue Acts which raised the top marginal corporate income tax rate from 19% to 40%. [5]
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Pro & Con Arguments: "Does Lowering the Federal Corporate Income Tax Rate Create Jobs?"
PRO Lower Corporate Taxes, More Jobs

  1. US businesses move overseas because the United States has one of the highest statutory federal corporate income tax rates in the world. At 35%, the United States is tied for the second highest top-bracket federal corporate income tax rate in the world behind Antigua & Barbuda and Congo (and is the highest in the OECD), and it has a higher "effective" corporate tax rate (27.6%) than 164 out of 183 other countries. [2] These high tax rates force American companies to relocate their employees overseas. For example, Aon, a company with $11.28 billion in 2011 revenue that moved its headquarters from Chicago to London in 2012, said the move would reduce its tax rate by five percentage points, increase its profits by about $100 million annually, and allow them to expand by hiring more employees. [6]


  2. High corporate income tax rates encourage US companies to store their foreign earnings abroad instead of investing it into expansion and employment in the United States. A May 16, 2012 study by J.P. Morgan found that 60% of the cash held by 602 US multi-national companies is sitting in foreign accounts. If an income tax cut is offered to companies that return this cash, the study estimates that $663 billion would be invested into business expansion and job growth in the United States. [7]


  3. Lowering corporate income taxes results in increased international investment in the United States and thus more jobs. According to a 2006 peer-reviewed study of corporate tax rates and foreign direct investment (FDI) in 85 countries, a 10% reduction in the corporate income tax rate is associated with an increase in foreign direct investment equivalent to 2.2% of the country's Gross Domestic Product (GDP). That investment money can be used by US businesses to invest and expand their workforce. [8]


  4. The average five-year unemployment rate decreased from 1987-1991 after the United States lowered its top corporate income tax rate. During Ronald Reagan's presidency (1981-1988), the Tax Reform Act of 1986 (implemented in July 1987) lowered the top federal corporate income tax rate from 46% to 34%. [9] From 1982-1986, the average unemployment rate was 8.2%. From 1987-1991, the average unemployment rate was 5.9%. [4]


  5. Raising corporate income taxes lowers worker wages, which leads to increased unemployment. Using 1970-2007 data from the United States, a Tax Foundation study found that for every $1 increase in state and local corporate tax revenues, hourly wages can be expected to fall by roughly $2.50. [10] Lower wages for workers results in a decreased ability to buy goods, which leads to lower income for businesses and a net increase in unemployment. [11]


  6. President Obama's top economic advisory task force links lowering the statutory corporate income tax rate with economic expansion, investment, and job growth. The President's Economic Recovery Advisory Board (PERAB), in its Aug. 2010 paper titled "The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation," states that a high corporate tax rate "causes or exacerbates many... significant economic distortions." The report calls for lowering the rate of the top two corporate tax brackets to "increase the stock of available capital - new businesses, factories, equipment, or research - improving productivity in the economy," and says that it would reduce the incentives of US companies to shift operations and employees abroad. [12]


  7. High corporate tax rates create uncertainty for businesses, preventing them from investing and employing more people. Bank of America CEO Brian Moynihan said lowering corporate income tax rates would provide a "certainty premium" that would allow businesses to expand. "If we can just allow people to keep their confidence up by getting some of these issues off the table," he said, "you would see the economy grow and momentum continue to build, and unemployment continue to ease down... All that will continue to build on itself." [13]


  8. Lowering the corporate tax rate leads to economic growth and job creation because companies have more money to invest. A tax cut that increases corporate or personal income equivalent to one percent of GDP increases GDP by between 2-3%, according to a June 2010 peer-reviewed study by UC Berkeley Political Economy Professor David Romer, and former head of Obama's Council of Economic Advisers Christina Romer. A tax increase of one percent of GDP lowers GDP by roughly three percent. Higher GDP leads to job growth because companies make more money and have more to invest. [14]


  9. The current federal corporate income tax rate is above the rate that maximizes revenue to corporations and the US government, preventing additional job growth. The "Laffer" curve theorizes that at a 0% tax rate the government would not receive any revenue and at a 100% tax rate businesses would choose not to operate at all. According to several peer-reviewed studies on the Laffer curve, the corporate income tax rate that maximizes revenue to both corporations and the US government is 30%, lower than its current rate of 35%. That excess revenue can be used by businesses to invest and expand. [15]
CON Lower Corporate Taxes, More Jobs

  1. The federal corporate income tax rates were the highest in US history when the unemployment rates were the lowest in US history. From 1951, when the top marginal corporate income tax rate rose from 42% to 50.75%, to 1969, when rates peaked at 52.8%, the unemployment rate moved from 3.3% to 3.5%. From 1986 to 2011, when the top marginal corporate income tax rate declined from 46% to 35%, the unemployment rate increased from 7% to 8.9%. [3][4]


  2. A "tax holiday" in 2004, which temporarily lowered the corporate income tax rate for companies that brought back cash stored overseas, resulted in companies cutting jobs. In 2004, Congress passed a repatriation tax holiday that allowed companies to bring back profits earned abroad at a 5% income tax rate instead of the top 35% rate. Fifteen of the companies that benefited the most from the tax holiday subsequently cut more than 20,000 net jobs. [16]


  3. Companies hire employees because they need workers, not because of corporate income tax rates. According to a Nov. 15, 2011 blog post from billionaire Dallas Mavericks owner Mark Cuban, "you hire people because you need them. You don't hire them because your taxes are lower." [17] In a July 2011 survey of 53 prominent American economists, 65% said that lack of demand was the main reason why employers were not hiring new employees as compared to 27% who said that uncertainty about corporate taxation was the main reason. [18]


  4. Complaints about high federal corporate income tax rates causing high unemployment are unfounded because loopholes and deductions enable many companies to pay less than the statutory rate. Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a total corporate tax rate – federal and state combined – of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%. [1] General Electric, a multi-national corporation with net income of $14.16 billion, paid an effective tax rate of 7% in 2010. [19] A 2011 study comparing the effective tax rates of the 100 largest US multinationals to the 100 largest European Union [EU] multinationals during the period of 2001-2010 found that EU multinationals have a higher average effective tax rate despite having to pay a lower statutory rate. [20]


  5. Corporate profits in the United States are the highest they have been in 61 years, yet the federal unemployment rate is higher than most of the rest of the developed world. In 2011, corporate profits made up 10% of US GDP, the highest percentage since 1950. [21][22] In 2011, the US unemployment rate was 8.9% compared to the OECD (Organisation of Economic Cooperation and Development) average of 8.2%. [4][23] Despite the highest corporate income tax in the world, corporate income tax revenue only brought the US federal government the equivalent of 1.2% of GDP in 2011 (the lowest percentage in recorded history), compared to the OECD average of 2.9% in 2010. [24]


  6. Lowering the corporate tax rate raises the deficit, which hurts job creation. Lowering the federal corporate tax rate reduces the amount of money the US government receives in tax revenue, thus reducing federal government programs, investments, and job-creating opportunities. When the Tax Reform Act of 1986 reduced the top marginal rate from 46% to 34%, the federal deficit increased from $149.7 billion to $255 billion from 1987-1993. [25]


  7. Complaints about high federal corporate income tax rates causing high unemployment are unfounded because corporations are sitting on record amounts of cash. As of Oct. 23, 2012, large companies listed in the S&P 500 are holding onto $1.5 trillion in cash (14% of their total value), the highest amount in American history. [26] This cash could, but is not, be used to hire more employees and lower the unemployment rate. President Obama, in a July 22, 2009 press conference, stated "there have been reports just over the last couple of days of... companies making record profits, right now. At a time when everybody's getting hammered, they're making record profits." [27]


  8. The US economy added 15 million jobs in the five years immediately following a large federal corporate income tax increase in 1993. The Omnibus Budget Reconciliation Act of 1993 added three new corporate tax brackets and increased the income tax rates for corporations making income over $10 million. [28][29] The US economy added more than 15 million jobs and grew at an average annual rate of 3.8% in the five years after the legislation was passed. [30]
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Background: "Does Lowering the Federal Corporate Income Tax Rate Create Jobs?"
(Click to enlarge image)
OECD Corporate Tax Rates. Statutory rates for 2012 and effective from 2006-09.
Source: Organisation of Economic Co-operation and Development, "Taxation of Corporate and Capital Income," oecd.org, 2012
The creation of the federal corporate income tax occurred in 1909, when the uniform rate was 1% for all business income above $5,000. [3] Since then the rate has increased to as high as 52.8% in 1969, and the single rate has become eight different rates for different income levels. [3] Today's rate for companies with over $18.3 million in income (the top category) is 35%. [3] Throughout US corporate tax history, Americans have debated whether or not lowering the rate results in job creation.

Proponents of lowering the corporate tax rate to create jobs argue that it incentivizes job creation in the United States instead of overseas, encourages increased investment in research and infrastructure, and passes savings on to consumers through lower prices. They say that the United States already has the highest corporate income tax rates in the world, which creates a competitive disadvantage for US businesses.

Opponents of lowering the corporate tax rate to create jobs argue that it results in more profits for corporations without affecting job creation, and that unemployment rates were the lowest in recorded US history during the time when corporate income tax rates were highest. They say that lowering the rate would increase the US deficit, and that companies hire employees based on need, not because of corporate tax rates.

The first federal income tax was levied by Congress from 1862-1872 to pay for the Civil War, but was replaced by a tariff (a tax on imported goods that raises prices for consumers to advantage domestic producers). The federal income tax (a 2% flat tax on incomes above $4,000, including corporate income) was revived by Congress in the Income Tax Act of 1894, which the Supreme Court declared unconstitutional in 1895 in Pollack v. Farmers’ Loan & Trust. In a 5-4 decision, the justices ruled that federal taxes on personal income are "direct taxes," a class of taxes that Article I, Section 2, Clause 3 of the Constitution requires be "equally apportioned among the states according to population." According to the Wall Street Journal, imposing personal income taxes equally among states is "obviously impossible," because state populations vary widely and fluctuate from year to year. [30]

Since corporate income taxes were considered "excise" taxes (taxes on the sale, or production for sale, of specific goods), the Supreme Court’s ruling did not apply to them. [30] In a June 16, 1909 address to Congress, President William Howard Taft proposed simultaneous actions: a constitutional amendment allowing the federal government to levy a personal income tax and a separate federal tax on corporate income. [31][32] The Corporation Excise Tax Act of 1909 imposed a 1% tax on corporate income above $5,000. [31] On Feb. 3, 1913, Congress passed the 16th Amendment, giving Congress the "power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States…" [30]

From 1909 - the first year the federal government levied a separate corporate income tax - to 1935, corporations paid a fixed percentage of their income in taxes regardless of how much they made (although taxes were usually exempted for the first several thousand dollars). From 1936 to today, the number of federal corporate income tax brackets has increased from two to eight. Corporations today pay a 15% tax rate on the first $50,000 in income, up to 35% on all income above $18.33 million. The corporate income tax reached its peak in 1968-1969, when all income over $25,000 was taxed at a rate of 52.8%. [3]

(Click to enlarge image)
Number of pages of federal tax code, 1913-2012
Source: "2012 CCH Whole Ball of Tax," CCH.com (accessed June 15, 2012)

Corporate income taxes rose from 12.3% of total government revenue in 1934 (the first year data are available) to a peak of 39.8% in 1943, before steadily declining through 1986 to 8.2%. [24] Corporate income tax receipts rose to 14.7% of revenue in 2006 before declining to 8.3% in 2011. [24] As a percentage of US Gross Domestic Product (GDP), corporate income taxes rose from 0.6% in 1934 to a peak of 7.2% in 1945, before declining to 1.2% in 2011. [21]

The US unemployment rate for persons 16 years of age and older rose from 3.9% in 1947 (the first year data are available) to 6.8% in 1958. The rate steadily declined to 3.5% in 1969, but then rose to a historical peak of 9.7% in 1982. The unemployment rate declined again to 4% in 2000, and it increased again to the Oct. 2012 rate of 7.5%. [4]

The United States, as of Dec. 13, 2012, has the highest top federal corporate income tax rate in the OECD at 35%, with Belgium (34%), France (34.4%), Australia (30%), Japan (30%), Mexico (30%), Spain (30%), New Zealand (28%), Norway (28%), and Italy (27.5%) rounding out the top ten. [33] Even after accounting for additional state-level corporate income tax rates, the United States remains on top (39.1%). [33] Since 1997, 30 of the Organization of Economic Cooperation and Development (OECD) member counties have lowered their statutory (written) corporate income tax rates, creating an average tax burden of 25.1%. [33]

Businesses, however, rarely ever pay the statutory corporate income tax rate, due to a wide variety of tax exemptions, preferences, and deductions. The "effective tax rate" is defined as the "ratio of tax paid to pre-tax profits for a given period," according to the Tax Foundation. Effective tax rates, therefore, measure "the real tax cost of investment and reflect the corporate tax burden." [34] In 2011, the effective corporate tax rate in the United States was 29.2% (including state and local taxes), roughly in line with the 31.9% average of the six other largest developed economies (Canada, France, Germany, Italy, Japan, and the UK), and fourth highest among the 34 OECD countries. [2][44][45]Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a total corporate tax rate – federal and state combined – of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%. [1]

From 1909 through 1945, Congress consistently raised the corporate income tax, and despite a brief decrease from 1945-1952 to encourage business growth following World War II, continued to raise it through 1978. In 1942, in the midst of World War II, US President Franklin Roosevelt said "when so many Americans are contributing all their energies and even their lives to the nation's great task, I am confident that all Americans will be proud to contribute their utmost in taxes." [35] From 1940 to 1942 alone, Congress passed four separate Revenue Acts which raised top marginal corporate income tax rates from 19% to 40%. [5]

President Lyndon Johnson, citing the need to approve "a sensible course of fiscal and budgetary policy" and unwilling to gut his comprehensive entitlement programs to pay for the Vietnam War, signed into law the Revenue and Expenditure Control Act of 1968. [35] This act created a temporary 10% income tax surcharge on corporations and increased the top marginal tax rate from 48% to 52.8%. [36] Congressional Chair of the House Ways and Means Committee and fiscal conservative Wilbur Mills (D-AR), an ardent skeptic of corporate tax increases, called the act "fiscal activism” and agreed to its passage only after a concurrent 10% cut in federal discretionary spending. [35]

(Click to enlarge image)
Corporate tax revenue as a percentage of GDP, 1950-2010
Source: Michael Diedrich, "Graph of the Day: Jobs and Taxes," mn2020hindsight.org, Oct. 20, 2011

The 1980s saw four major changes to federal corporate income taxes. The most consequential change, the Tax Reform Act of 1986, reduced the number of corporate income tax brackets from seven to five and slashed rates for all businesses while eliminating $30 billion annually in corporate tax loopholes. [9] Bill Bradley, a Democratic Senator from New Jersey who worked to pass the legislation, said that "the trade-off between loophole elimination and a lower top rate became obvious (the lower the rate, the more loopholes had to be closed to pay for it)… The bipartisan coalition produced a bill that... led to more… economic competitiveness." [37] Former Republican Senator Alan Simpson, in a statement blasting the act, stated that "the tax reform of 1986 [closed] loopholes that resulted in the largest corporate tax hike in history… Reagan raised taxes 11 times in eight years!" [38] From Oct. 1986, when the Tax Reform Act of 1986 lowered the top marginal corporate income tax rate from 46% to 34%, to Aug. 1993, when rates were increased on businesses earning over $10 million, the federal unemployment rate remained at 6.6%. [3][4]

On Aug. 10, 1993, President Bill Clinton signed into law the Omnibus Budget Reconciliation Act, which created four new corporate tax brackets with increased rates for businesses with incomes over $335,000. [28] Vice President Al Gore, in a statement hailing the bill’s passage, said "[This bill] means jobs, growth, tax fairness… It’s a message of hope to the small business owner and 96% of all small businesses who will get a tax cut under this plan." [39] The bill was attacked by United States Chamber of Commerce president Richard Lesher, who said that the corporate tax increases would "slow economic growth and fuel inflation..." and that "foreign competitors would gain an economic advantage over American goods here and abroad." [40] A group of 300 major corporations and trade associations known as the Tax Reform Action Coalition said it "strongly opposed Mr. Clinton’s move to increase the top rates for… corporate taxes." [40] From the passage of the bill until the end of Clinton’s term, the US economy gained more than 21.4 million jobs, the unemployment rate fell from 6.8% to 3.9%, industrial production rose by 5.6% per year, and the Dow Jones Industrial average rose 26.7% per year. [41] The tax brackets and rates created by the bill remain in place today.

The corporate tax rate became a topic of discussion in the lead-up to the 2012 presidential election, as President Barack Obama and Republican candidate Mitt Romney outlined their preferred policies. According to the Feb. 2012 "President’s Framework for Business Tax Reform,” released jointly by the White House and the Department of Treasury, the United States should "[reduce] the top corporate tax rate from 35% to 28%... and [eliminate] dozens of business tax loopholes and tax expenditures..." [42] Romney's budget plan called for reducing the top corporate tax rate to 25% to "jumpstart the economy." [43]
Video Gallery


A 60 Minutes report on whether or not high corporate income tax rates cause companies to move their headquarters overseas.
Source: 60 Minutes, "Are US Corporate Taxes Rates [sic] Too High?," youtube.com, Mar. 27, 2011
Investor Warren Buffet discusses corporate income taxes on CNBC.
Source: Think Progress, "Buffet on Corporate Taxes", youtube.com (accessed June 6, 2014)
Advocacy organization Eliminate Corporate Income Tax contends that the federal corporate income tax should be abolished.
Source: Eliminate Corporate Income Tax, "Eliminate U.S. Corporate Income Tax," youtube.com (accessed June 6, 2014)
Former MSNBC contributor Cenk Uygur contends that lowering the corporate tax rate would not create more jobs in the United States.
Source: The Young Turks, "Corporate Tax Cuts Create Jobs (Outside of America)," youtube.com, (accessed June 6, 2014)

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