Cut Corporate Taxes Now!

America’s corporate tax rate has two problems – it is too high and too low.  Too low in that it collects very little revenue, through a combination of factors – loss harvesting, special tax exemptions, and booking profits overseas.  Too high in that its statutory rate – 35% – is extremely high, driving a lot of this behavior.  As a result, while the United States has one of the highest corporate tax rates in the developed world (as conservatives fixate on), its effective tax rate is one of the lowest in the developed world.  It could be reasonably argued that the United States is on the wrong side of the Laffer Curve, at least with regards to corporate taxes.  Conservatives like to use this to argue that the United States could reap huge rewards in terms of economic growth by lowering corporate taxes.  This is wrong – but even so, there’s a solid political economy argument that the Democrats should move to lower and reform corporate taxes.  Why? So the Republicans don’t get there first.

The last time Congress took up corporate taxes in 2004, it was to pass a “holiday” on repatriation – wherein corporations could bring home profits domiciled abroad without paying taxes on them.  The problem?  Well, it doesn’t provide any reason to pay taxes on the day after the holiday – and it in fact encourages domiciling profits abroad, because if Congress passes one holiday that’s an excellent reason to believe they might pass another.  Indeed, right on cue in 2011 Congress took up this idea again until the Democrats killed it, pointing out that when this behavior is repeated it’s nothing more than a series of free giveaways to the wealthy, and effectively eviscerates the tax regime for anyone who can afford a decent tax lawyer.

The Democrats should move to permanently cut corporate taxes now, to head off Republicans passing a repatriation holiday when they retake Congress.  Lowering taxes and perhaps providing a partial holiday would remove the gigantic stores of offshore profits that Republicans would point to when calling for a holiday, and the total amount of revenue recovered would be far greater.  It may or may not result in the rational corporate tax system that everyone in Washington claims to want, but it’s surely better than the inevitable giveaway that will result when the Republicans retake Congress.  And a corporate tax cut is one of the few policies the Democrats could propose that might make it through the GOP-controlled house.

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