Does Lowering the Federal Corporate Income Tax Rate Create 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 background...

Top Pro & Con Arguments

US businesses move overseas because the United States has one of the highest statutory federal corporate income tax rates in the world. The United States has the highest top-bracket federal corporate income tax rate (nearly 40%) among OECD countries, and the third-highest in the world, behind the United Arab Emirates and Puerto Rico. The United States also has the highest "effective" corporate tax rate (29%) of the G20 countries. [47] These high tax rates force American companies to relocate their employees overseas. For example, Johnson Controls, a company with a market value of $23 billion, moved its headquarters from Milwaukee, Wisconsin, to Ireland in 2016. In a memo to employees, a spokesperson said the move would save the company about $150 million dollars in US taxes annually, explaining that setting up headquarters abroad "retains maximum flexibility for our balance sheet and ability to invest in growth opportunities everywhere around the world." [48]



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. The Congressional Joint Committee on Taxation estimated that untaxed foreign earnings of American companies totaled approximately $2.6 trillion in 2015. [49] A J.P. Morgan study found that 60% of the cash held by 602 US multi-national companies was sitting in foreign accounts. If an income tax cut were offered to companies that returned this cash, the study estimated that $663 billion would be invested into business expansion and job growth in the United States. [7]



Lowering corporate income taxes results in increased international investment in the United States and thus more jobs. According to a working paper published by the OECD, countries with higher corporate tax rates lose revenue in foreign direct investment (FDI) as compared to countries with lower corporate tax rates. [50] A peer-reviewed study published in Applied Economics looked at corporate tax rates and FDI in 85 countries. The study found that a 10% reduction in the corporate income tax rate was associated with an increase in foreign direct investment equivalent to 2.2% of the country's Gross Domestic Product (GDP). That investment money could be used by US businesses to invest and expand their workforces. [8]



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]



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]



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]



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 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] The President's Economic Recovery Advisory Board (PERAB), which operated during President Obama's tenure, in a paper titled "The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation," called for lowering the corporate tax to "increase the stock of available capital - new businesses, factories, equipment, or research - improving productivity in the economy," and said that it would reduce the incentives of US companies to shift operations and employees abroad. [12]



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]



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]



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]



Companies hire employees because they need workers, not because of corporate income tax rates. According to a 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 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] A study conducted by the Congressional Budget Office found that a reduction in corporate taxes "does not create much incentive for them [businesses] to hire more workers in order to produce more, because production depends principally on their ability to sell their products." [52] The Roosevelt Institute, a New York-based think tank, stated that "corporate tax cuts will only increase payouts to wealthy shareholders and will not increase investment or create jobs." [53]



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] An analysis comparing the tax rates of 258 profitable Fortune 500 companies between 2008 and 2015 found that almost 40% paid zero taxes for at least one year over the eight-year period. Of those 258, 18 companies paid less-than-zero over the entire period. [51] A 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 US multinationals have a lower average effective tax rate despite having a higher statutory rate. [20]



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]



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]



Complaints about high federal corporate income tax rates causing high unemployment are unfounded because corporations are sitting on record amounts of cash. A report by Moody's Investor Service stated that non-financial US companies held onto $1.77 trillion in 2016, an increase from the previously historic high of $1.68 trillion in 2015. [54] This cash could have been, but was not, used to hire more employees and lower the unemployment rate. President Obama, in a July 22, 2009 press conference, stated "companies [are] making record profits, right now. At a time when everybody's getting hammered, they're making record profits." [27]



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]



Top Pro & Con Arguments
Pro
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... Read More


Pro
1

US businesses move overseas because the United States has one of the highest statutory federal corporate income tax rates in the world.

The United States has the highest top-bracket federal corporate income tax rate (nearly 40%) among OECD countries, and the third-highest in the world, behind the United Arab Emirates and Puerto Rico. The United States also has the highest "effective" corporate tax rate (29%) of the G20 countries. [47] These high tax rates force American companies to relocate their employees overseas. For example, Johnson Controls, a company with a market value of $23 billion, moved its headquarters from Milwaukee, Wisconsin, to Ireland in 2016. In a memo to employees, a spokesperson said the move would save the company about $150 million dollars in US taxes annually, explaining that setting up headquarters abroad "retains maximum flexibility for our balance sheet and ability to invest in growth opportunities everywhere around the world." [48]


Pro
2

High corporate income tax rates encourage US companies to store their foreign earnings abroad instead of investing it into expansion and employment... Read More


Pro
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.

The Congressional Joint Committee on Taxation estimated that untaxed foreign earnings of American companies totaled approximately $2.6 trillion in 2015. [49] A J.P. Morgan study found that 60% of the cash held by 602 US multi-national companies was sitting in foreign accounts. If an income tax cut were offered to companies that returned this cash, the study estimated that $663 billion would be invested into business expansion and job growth in the United States. [7]


Pro
3

Lowering corporate income taxes results in increased international investment in the United States and thus more jobs. According to a 2006 peer-reviewed... Read More


Pro
3

Lowering corporate income taxes results in increased international investment in the United States and thus more jobs.

According to a working paper published by the OECD, countries with higher corporate tax rates lose revenue in foreign direct investment (FDI) as compared to countries with lower corporate tax rates. [50] A peer-reviewed study published in Applied Economics looked at corporate tax rates and FDI in 85 countries. The study found that a 10% reduction in the corporate income tax rate was associated with an increase in foreign direct investment equivalent to 2.2% of the country's Gross Domestic Product (GDP). That investment money could be used by US businesses to invest and expand their workforces. [8]


Pro
4

The average five-year unemployment rate decreased from 1987-1991 after the United States lowered its top corporate income tax rate. During Ronald... Read More

Pro
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]


Pro
5

Raising corporate income taxes lowers worker wages, which leads to increased unemployment. Using 1970-2007 data from the United States, a Tax Foundation... Read More


Pro
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]


Pro
6

High corporate tax rates create uncertainty for businesses, preventing them from investing and employing more people. Bank of America CEO Brian... Read More


Pro
6

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]


Pro
7

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... Read More


Pro
7

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 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] The President's Economic Recovery Advisory Board (PERAB), which operated during President Obama's tenure, in a paper titled "The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation," called for lowering the corporate tax to "increase the stock of available capital - new businesses, factories, equipment, or research - improving productivity in the economy," and said that it would reduce the incentives of US companies to shift operations and employees abroad. [12]


Pro
8

The current federal corporate income tax rate is above the rate that maximizes revenue to corporations and the US government, preventing additional job... Read More


Pro
8

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
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... Read More


Con
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]


Con
2

A "tax holiday" in 2004, which temporarily lowered the corporate income tax rate for companies that brought back cash stored overseas, resulted in... Read More


Con
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]


Con
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... Read More


Con
3

Companies hire employees because they need workers, not because of corporate income tax rates.

According to a 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 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] A study conducted by the Congressional Budget Office found that a reduction in corporate taxes "does not create much incentive for them [businesses] to hire more workers in order to produce more, because production depends principally on their ability to sell their products." [52] The Roosevelt Institute, a New York-based think tank, stated that "corporate tax cuts will only increase payouts to wealthy shareholders and will not increase investment or create jobs." [53]


Con
4

Complaints about high federal corporate income tax rates causing high unemployment are unfounded because loopholes and deductions enable many companies... Read More


Con
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] An analysis comparing the tax rates of 258 profitable Fortune 500 companies between 2008 and 2015 found that almost 40% paid zero taxes for at least one year over the eight-year period. Of those 258, 18 companies paid less-than-zero over the entire period. [51] A 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 US multinationals have a lower average effective tax rate despite having a higher statutory rate. [20]


Con
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... Read More


Con
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]


Con
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... Read More


Con
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]


Con
7

Complaints about high federal corporate income tax rates causing high unemployment are unfounded because corporations are sitting on record amounts... Read More


Con
7

Complaints about high federal corporate income tax rates causing high unemployment are unfounded because corporations are sitting on record amounts of cash.

A report by Moody's Investor Service stated that non-financial US companies held onto $1.77 trillion in 2016, an increase from the previously historic high of $1.68 trillion in 2015. [54] This cash could have been, but was not, used to hire more employees and lower the unemployment rate. President Obama, in a July 22, 2009 press conference, stated "companies [are] making record profits, right now. At a time when everybody's getting hammered, they're making record profits." [27]


Con
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... Read More


Con
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]



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]





Notices for Corporate Tax and Other ProCon.org Information (archived after 30 days)

Does Lowering the Federal Corporate Income Tax Rate Create Jobs?
7/24/2017 - Check out the Top 8 pro and con arguments for lowering corporate taxes, backed with quotes and statistics, to develop an informed opinion on this issue.

Does Lowering the Federal Corporate Income Tax Rate Create Jobs?
7/13/2017 - Learn about the pros and cons with quotes from experts such as Harvard economics professor Martin Feldstein (pro), former President and CEO at the Center for Effective Government Katherine McFate (con), Senator Orrin Hatch (pro), and billionaire Warren Buffett (con).

Archived Notices (archived after 30 days) Last updated on 7/24/2017 10:37:42 AM PST