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. Today’s rate is set at 21% for all companies. 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…
Pro & Con Arguments
If the corporate tax rate is too high, businesses will move overseas.
Prior to President Trump’s corporate tax reduction, the United States had one of the highest corporate tax rates in the world.Those 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.” Read More
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.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. Read More
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. 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.A peer-reviewed study published in Read More
Federal legislation that lowered the corporate tax rate has resulted in reduced unemployment and increased worker benefits.
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%. From 1982-1986, the average unemployment rate was 8.2%. From 1987-1991, the average unemployment rate was 5.9%. In Jan. 2018 the Tax Cuts and Jobs Act lowered the federal corporate income rate from a top bracket 35% to a flat-rate 21%. In the two months following implementation of the act, over 370 companies cited the law when announcing employee wage increases, bonuses, and benefits such as better 401(K)s and tuition assistance.Read More
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.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. Read More
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.”Read More
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.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. Read More
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%.Read More
Federal legislation that lowered the corporate tax rate has resulted in companies cutting jobs and disproportionally benefiting already wealthy shareholders rather than workers.
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. Tax Cuts and Jobs Act in 2018, which lowered the federal corporate tax rate and included a one-time repatriation “tax holiday” of between 8% and 15.5%, American companies announced over $171 billion of benefits for shareholders and $5.6 billion for workers. A survey by Morgan Stanley found that 43% of corporate tax cut savings would go to investors and 13% would be spent on worker benefits.Following implementation of President Trump’s Read More
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.”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. 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.” 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.” Read More
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%.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. 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. Read More
Lowering the corporate tax rate raises the deficit, which hurts job creation and wages.
A lower federal corporate tax rate means less government tax revenue, thus reducing federal 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. The Congressional Budget Office estimates that President Trump’s Tax Cuts and Jobs Act will increase the projected federal deficit from $16 trillion in 2018 to $29 trillion by 2028.Read More
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.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.” Read More
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. 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.Read More
|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%.|
|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.|
|3. The federal government has collected a corporate income tax since 1909, when the rate was 1% for all business income above $5,000.|
|4. The corporate income tax rate reached 52.8% from 1968-1969, the highest in US history.The unemployment rate during these years was 3.6% and 3.5% respectively.|
|5. From 1940 to 1942, Congress passed four separate Revenue Acts which raised the top marginal corporate income tax rate from 19% to 40%.|
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