Corporate Rate Cuts Are a Poor Way to Help the Economy and Most Workers — and Could Hurt Them

http://www.cbpp.org/research/federal-tax/corporate-rate-cuts-are-a-poor-way-to-help-the-economy-and-most-workers-and

Center for Budget and Policy Priorities


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Little suggests that the current corporate tax — or poor corporate profitability — is a major constraint on the U.S. economy or U.S. corporations’ “competitiveness”

• U.S. corporate profits are near their highest level in 85 years as a share of the economy, while employee compensation is close to its lowest level. Corporations don’t need major tax breaks; tax reform should focus on raising typical workers’ incomes.
• The U.S. stock market continues to outperform European Union stocks coming out of the recession.
• As they post record profits, many large U.S. multinationals are flush with cash — and in recent years they’ve paid out much of it to shareholders through record dividends and share buybacks. This belies multinationals’ claims that cutting taxes on their profits would free up cash that they would use to invest. Rather, they’re likely to continue increasing payouts to high-income shareholders with the new tax cuts.

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When taking into account tax breaks and loopholes that corporations use to lower their taxes, U.S. corporate tax rates are well below the 35 percent top statutory rate and in line with those in other high-income countries (those most likely to be similar to the United States in their attractiveness for companies to locate and invest for reasons unrelated to tax rates). The Treasury Office of Tax Analysis estimates:

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• Most corporate rate cuts go to high-income investors and don’t “trickle down” to workers. Proponents of corporate rate cuts often claim workers will benefit because companies will invest more and therefore boost wages. But mainstream estimates are that only a very small share of corporate rate cuts eventually flows to workers — and even taking this effect into account, the Tax Policy Center finds that about 80 percent of the benefit of a corporate rate cut flows to the top fifth of households, and about 53 percent flows to the top 1 percent.
• Corporate rate cuts could actually hurt growth and the majority of Americans. If rate cuts are not paid for by reducing corporate tax breaks and loopholes, the increased deficits would reduce national saving, meaning less capital would be available for investment in the economy and interest rates could rise. Further, in the long run, these deficit-financed tax cuts would have to be paid for, either through increases in other taxes or cuts to government services. Given these eventual financing costs, unpaid-for corporate tax cuts would likely leave most Americans worse off in the long run, even if they generated modest near-term economic benefits.

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True corporate tax reform would close loopholes and scale back corporate tax breaks that today allow many large, profitable businesses to pay very little in taxes. Such reform could help the economy by helping to ensure that investments flow to where they are most productive, rather than towards tax breaks and tax avoidance schemes. Such tax reform would address the inefficient tilts in the corporate tax code towards:

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