President Trump’s tax plan, unveiled on Thursday, slashes the corporate tax rate from a top rate of nearly 50% to 15%. It’s a smart move. Not only will it kick start the economy and job growth, but it’s likely he’ll be able to get bipartisan support.
Right now, there is no consensus on broad-based tax reform. So, at least for now, a broad tax reform package including tax cuts, fewer deductions and a flattening of tax rates may be tough to achieve. Even Republicans, who are eager for some kind reform, remain split on how it should be done.
But nearly everyone agrees that the current U.S. corporate tax rate is outrageous.
Sadly, average Americans often don’t agree. They believe that corporations pay no taxes. But that’s not true. U.S. corporations pay a top marginal rate of close to 40%, compared to an average of about 24% for all the OECD nations.
That puts U.S. companies at a tremendous disadvantage to other nations’ companies and reduces the money they have available for investing and hiring new workers.
We don’t know what else Trump’s tax reform will contain, but just cutting corporate taxes would be a big winner. Even President Obama supported the idea in 2015, when he and congressional Democrats were considering a deal that would cut corporate tax rates in exchange for spending more on infrastructure.
But apart from Washington political wrangling, the economic reasons for a corporate tax cut are even more compelling.
Back in 2015, the nonpartisan Tax Foundation ran the numbers and concluded that cutting the corporate rate to 15% would boost GDP by 3.7% and actually increase federal revenues by 0.3%.
More importantly, it would be a huge boon to working Americans: “Depending on the size of the corporate rate reduction, we would expect to see an additional 425,000 to 613,000 new jobs, and wages would increase between 1.9% and 3.6% over the long-term.”
That means higher after-tax incomes for all. Talk about a stagnation-buster. That’s a recipe for 3% plus annual GDP growth, something that never happened during the Obama years. The plan that was Trump unveiled Thursday said that one of the goals of tax reform was to “grow the economy and create millions of jobs.”
Nor is this a “tax cut for the rich,” as some have claimed.
As IBD noted last September, the “dirty little secret” of corporate taxes is that corporations don’t actually even pay them. Average Americans — that’s you — do. You pay it through lower wages, lower returns on investments and retirement accounts, and higher prices for the things you buy.
A study last year by The R Street Institute noted that “some studies suggest that as much as three-fourths of direct corporate income-tax costs are borne by a firm’s workers.”
High corporate tax rates are also why many big American companies are undergoing “inversions” — merging into a foreign company, then relocating their headquarters to the foreign country to avoid super-high U.S. taxes.
In short, our excessively high corporate tax rate does nothing good for the economy, for investors or for workers. While 15% is a very good rate, it would be better to get rid of it entirely….
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