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.
Warning – this is a post without empirical evidence.*
One of the most frustrating things ever is hearing the argument that tax incentives will bring startups to Our Depressed Rust-Belt Mid-American City. First of all, startups won’t replace the thousands of jobs lost when the old
cancer paper mill closed down – startups will employ far fewer people, and they will be mostly importing their talent from other cities/states/countries. That’s not terrible – those employees will still need meals cooked, lawns mowed, clothes cleaned, etc. The ancillary jobs of a thriving startup scene are often decent ones – but the good high-paying jobs won’t go to locals. No, the real issue with these policies is thinking that startups make decisions based on taxes.
A startup is a machine designed to turn ideas into products, and sometimes products into revenue, and products + revenue into growth. Notice a very important word that isn’t in that description? Profits. Very few startups are profitable from the get-go, and most aren’t meant to be – even the ones with massively positive cash flows show little or negative accounting profit. That’s because all of that cash is shoveled into growth. People starting startups couldn’t give two shakes about the statutory corporate tax rate because you need profits for taxes, and profits are unimaginably far away. When and if a startup becomes big enough to become profitable, it’ll already be domiciled someplace exotic with nice weather, secretive banking laws, and even more flexible tax codes.
There are tax incentives startups would care about a lot – incentives that make hiring talent cheaper. Rebates for payroll taxes are one very promising avenue. Today, payroll taxes are split half and half between employer and employee – for employers, it’s a tax on hiring people, and for employees it’s a flat tax on pay. If a local government offered payroll tax rebates to startups, that’s huge – it makes it cheaper for you to employ someone, and it makes their salary worth more. That’s actually a competitive advantage that could make it more appealing for a startup to relocate to Our Struggling Example Of Faded Mid-Century Glory And Metaphor For America’s Decline.
Tax incentives are good for existing businesses – but a narrow subset. Mid-sized businesses (small enough to feasibly relocate) with healthy profits (so the tax rate matters). Those are nice to have – but they’re hardly startups, and they’re not the type that grow quickly enough to revolutionize your city’s economy. Cutting corporate tax rates is basically orthogonal to the goal of encouraging startups, and I wish this tired old cliche were tossed out.
*: Don’t you wish more people warned you?