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Should Peorians Care about Corporate Tax Reform? (Yes)

March 15, 2012 5 minute Read by Ike Brannon

The tax-writing committees for both the House of Representatives and the Senate have been diligently reviewing various plans to reform the corporate tax code, and the White House recently jumped into the debate by releasing a corporate tax reform framework of its own. While it seems as if Congress is unable to pass even the simplest and most necessary legislation these days, experts who watch Congress give it decent odds of actually completing a corporate tax reform either shortly before or after the Presidential election in November. But a bigger question is, how does corporate tax reform play in Peoria? Or, asked differently, should the typical worker care about what our corporate tax code looks like? The answer is easy: Peorians of all stripes would benefit from the sorts of reforms being bandied about, although some reform ideas on the table are better than others. A sensible corporate tax code would ultimately lead to higher wages for both blue- and white-collar workers while potentially creating millions of new jobs. An important truism in economics is that the entity that writes the check to the government is not necessarily the one that pays the tax. People pay taxes, not corporations, and the corporate income tax must necessarily be paid by some combination of three different groups: The shareholders, via lower returns to their investments; the workers, via lower wages; or the consumers, via higher prices for the goods and services produced. The evidence suggests that it is the workers who bear the brunt of it, because companies can reduce or avoid high corporate taxes here by putting their factories in a country with a lower tax rate. Forty years ago it was difficult to build and operate a factory half a world away, but not anymore.  As a result, corporate income taxes across the world have fallen — except in the United States. And make no mistake: Our corporate tax rate is very high. The effective marginal corporate tax rate is nearly 40%, which by year-end will be the highest among all the developed nations, and twice as high as some of our main competitors. Workers should want companies to invest in new machines and more modern factories: While some may fear that greater mechanization and higher productivity may make more workers redundant, in reality, improving productivity is the only way to guarantee workers’ jobs, and it also happens to be the path to higher wages as well. So if Peorians should welcome corporate tax reform, should they care about what it looks like? Again, the answer is a resounding yes. Right now most proposed reforms involve a revenue-neutral change, where lower tax rates are effectively financed by the elimination of various deductions and credits in the corporate tax code. For instance, we allow companies to deduct the interest they pay each year from their income, which reduces their tax bill and encourages companies to load-up on debt. Few would object if these were eliminated and the savings used to lower the tax rate. However, one contentious reform proposal involves the various capital investment incentives currently in the tax code. Manufacturing and high-tech companies currently get to deduct the lion’s share of these expenses right away, saving them considerable money. Some Congressmen want to lessen these deductions and use those savings to lower tax rates even further. However, such a change would result in a larger reduction in effective tax rates for companies without much capital investment, like Goldman Sachs, at the expense of manufacturing concerns and a good number of high-tech companies. Besides the narrow political interest that Peorians would have in tax changes that penalize companies like Caterpillar, many economists believe that eliminating investment incentives to get a lower rate might actually reduce economic growth by lessening investment. How this gets resolved in any future tax reform is still up in the air: It is an issue that transcends party affiliation. Whether (and how) we reform the corporate tax code is more than just an accounting exercise done for the benefit of a few fat-cat stockholders: A sensible reform would improve wages and create jobs across the economy and do more to keep factories in this country than anything else our government could do. The more people recognize this, the more pressure there will be on Congress to set aside differences and actually pass such a reform.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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