As Tax Reform reaches it’s apogee in the American House and Senate, leading Israeli officials have vowed to follow with their own corporate tax cut. While this debate is headed in the right direction, it doesn’t cut quite deep enough. We need to go past cuts, and reconsider if we should even tax corporations in the first place.
It’s no secret that America is an open, global economy, meaning that domestic policy has international consequences and vice-versa. Our corporate income tax’s efficacy can only be measured against other countries, yet we’re miles above our competitors. According to Ernst and Young, the statutory corporate income tax rate on U.S. corporations is 39%, compared with Ireland (12.5%), Sweden (22%), Hong Kong (16.5%), Iraq (15%), Russia and the U.K. (20%), Israel (25%) and China (25%).
It doesn’t take a Ph.D economist to figure out that corporations will locate jobs, production, and financial activities in countries that have the lowest corporate tax rates.
So how come the U.S. is still among the highest?
Mainly, politics. Those on the left hear “corporate income tax cut” and immediately assume this means billions in additional revenue for Goldman Sachs, Wal-Mart and high-brow financiers, while the rest of us make up the burden in taxes on our meager, and shrinking wages. They can be forgiven for thinking that, but this view is misinformed.
Executives and multinationals can, and do, simply transfer their earnings to Ireland, and pay a lower-rate, so either way they are unaffected. Unfortunately, American workers, whose wages have stagnated since the 1960’s, don't have this luxury. The result is that when capital and jobs go abroad, fewer corporations operate in the US, lessening demand for labor, and therefore diminishing wages and boosting unemployment/underemployment. Contrary to how it may appear at first glance, the corporate income tax is economically self-defeating and hurts workers, not executives.
Another, more compelling, argument against the GOP’s plan to take the corporate tax rate down to 18.6% is that it will create a “race to the bottom” whereby every other developed country will respond by lowering their rate. This is highly likely to occur.
The answer, for America and Israel, is to take their corporate tax rates down to 0. Will this still produce a “race to the bottom”? You bet. But will already be at the floor, making ours the most competitive economies in the world for businesses to operate.
The upshot is that if we’re going to cut, and therefore create a domino effect of cuts amongst out competitors, than we might as well just go all the way from the get-go, as opposed to delaying the inevitable.
The amount of jobs and production that would accrue in the US and Israel after these cuts would be astounding, far offsetting the meager tax revenue that our corporate-income tax collects.* Besides, if we we’re truly worried about deficits, everyone in America would have to immediately and permanently accept a 60% tax hike with no corresponding increased benefits in order to make up the gap.
Still, Democrats insist that the corporate tax cut will be bad for the deficit while ignoring the full implications of their claim. You can’t have it both ways: either you ignore the deficit, or accept a 60% tax hike on all American’s; Larry Summers and other democrat’s who have sounded the alarm that the tax cut won't be revenue neutral are merely playing politics, for they understand that the revenues of the corporate tax comprise a mere dent in our countries $211 trillion fiscal gap; If they we’re serious about getting America’s fiscal house in order, they would have taken much more drastic measures years ago.
*The evidence that a corporate income tax will boost wages and grow the economy is abundant. Take Ireland, where the corporate income tax was 50% in 1987 but gradually reduced to 12.5% by 2003, where it stands today. First off, one can see how Ireland’s 50% rate in 1987, around what the US employed in 1953 (52%), wasn’t abnormally high at the time, and neither was ours. But as other countries have lowered their rates, the US has refused to do so and American workers have been left behind.
In Ireland, GDP per capita has gone from below $10k in 1980 to above $70k in 2016; In 2015 alone Irish GDP rose by 7.8%, compared to an average of 1.6% growth throughout the Eurozone; The boom was clearly a direct result of U.S. corporate investment.
We need to reconsider why, in a competitive, global economy, we tax corporations who provide precious jobs and revenues, and can easily relocate elsewhere. Our current debate revolves around cuts, which is a good start, however we should totally reconsider the idea of a corporate income tax, as it's returns are diminishing. If we're going to grow America and Israel's economies, we should start by making them the most attractive countries in which to operate. Our competitiveness, in an open-market world in which some countries, such as Japan, use state controls in order to give them an edge, depends upon it.The Republicans control the House, Senate and executive branch of government in the US, and the Likud governs in Israel. Both should motion towards completely eliminating their corporate income taxes. At long last, the people of our two great nations would get the raise they deserve. Daniel Smith, a history student at Wayne State University, can be reached at [email protected]