The U.S. Corporate Tax Rate Is Too High

NEW YORK - I bet most people don't know the U.S. Corporate tax rate is the second highest in the world. The U.S. currently has the second highest corporate tax rate in the world at 39.25% only second to Japan at 39.54%. This means nearly half of all U.S. corporate profit earned inside the United States is going to the government. Last year Exxon Mobil paid close to $40 billion in taxes. The Oracle of Omaha which usually speaks wisdom says it wouldn't be a bad idea to raise corporate taxes further but wouldn't? Corporate taxes unlike individual taxes are very different. If a company analyses an investment and sees it can make a return on capital after tax of 12% in Country B and 10% in the U.S. because of taxes then jobs are lost in the United States. The right policy would be to raise taxes on personal income, if one had to be picked because corporations can move more easily than individuals. The U.S. public is much more inelastic than corporation and a low tax rate on corporations increases spending in the U.S., more hiring and more people have jobs and more taxes could be paid.

Even if the corporations did not hire any workers, they could afford to pay higher dividends which go back to the people. Meaning if the government was to spend this money on programs or the free market just spend there would likely be minimal loss by the free market. The key part of the lowering of the tax rate though is to stimulate job creations. Corporations hire more people than anyone else. By hiring more people there are more people to pay taxes. Then it makes sense to raise the individual personal tax rate.

In 2010, the U.S. Government had $2.2 trillion in revenues with $180 billion coming from corporations. Corporations are taxed at 40% so lets say it was reduced to 25%, the tax inflow would reduce by $67.5 billion. This tax savings in effect creates a tax break for business. The average payout ratio in the U.S. is 50%. So $33.75 billion would be reinvested. Perhaps not all of it in the U.S. say 70%, with $24 billion back int he U.S. The other $33.75 billion in the form of dividends would go to U.S. consumers who on average save 3% of their income but lets say 10% so with these extra dividends you can probably provide $54 billion of stimulus. But lets not end it there.

This stimulus could be made up by raising personal tax rates which stands at a low 27%. One of the lowest of the developed world. If the U.S. raised personal tax rates by 6% to put them at 33% still lower than every country in the Europe besides Switzerland they could raise another $400 billion in revenue. Add another billion from increased corporate spending. And add countless billions by the increased spending of consumers as corporations hire more and you have a healthier economy.

Why tax corporations at the second highest in the world? Corporations are elastic and will move around to find cheap labour. Corporations also are not anything they are made up of people and extra profits go for more capital or for workers or for dividends which goes to people. Corporations also are important as they lead to great creativity and its important that they stay in the United States. In effect a corporation are just individuals and if corporations had no tax all of their income would just flow back into individuals pockets for them to spend to be taxed on. So in theory it could make sense to have a 0% corporate tax rate. However this would be silly because corporations may just hoard cash and it makes sense to tax them at a reasonable level. Why not bring the U.S. tax rate to a more reasonable level and the personal tax rate to a more reasonable level. The U.S. needs to do this with painful spending cuts and it will be in a better place financially in the future.

If a corporation is taxed at 50% he may say I am going to invest more in country x. If an individual was taxed at 80% it would be unlikely that the individual would instantly move countries. This is an absurd point but one showing, why lowing corporate taxes makes sense followed by raising individual taxes.