ON THE ECONOMY: TIME TO LOWER THE CORPORATE TAX RATE
Guest Columnist David Williams:
President of the Taxpayers Protection Alliance
On April 1, 2012, the United States achieved the dubious distinction of having the highest corporate tax rate of any OECD country. This high rate of taxation can and will have extremely negative consequences on the national economy at a time when the country can least afford it. According to a study by O’Melveny and Myers’s Jonathan Sallet and Robert Rizzi, innovation and economic growth are stifled by a high corporate tax rate.
Some of the key findings of their paper include:
The United States has continued to adhere to the policy of high corporate tax rates combined with targeted narrow tax breaks. This approach to tax policy creates substantial uncertainty regarding future policies and undermines job creation. Firms facing a burdensome corporate tax rate like those in the United States are at a competitive disadvantage against their international counterparts and could potentially “fall behind in innovation and productive capacity.”A lower federal corporate income tax rate will lead to additional capital investment and greater productivity. This boost in earnings and capital will serve as a direct catalyst for job creation and growth.Lower corporate tax rates equal a lower cost of capital while higher rates raise the cost of capital to firms. Studies have shown that companies facing high corporate tax rates will reduce a firm’s capital investment.
According to the Tax Foundation, “While there are many benefits of cutting the U.S. corporate tax rate, we’ve compiled 10 that should help convince lawmakers that this is the right policy direction for the nation….Cutting the corporate tax rate will promote higher long-term economic growth. Cutting the corporate tax rate will improve U.S. competitiveness. Cutting the corporate tax rate will lead to higher wages and living standards. Cutting the corporate tax rate will boost entrepreneurship, investment, and productivity. Cutting the corporate rate lowers the tax burden on low-income taxpayers and seniors. Cutting the corporate rate will lower the overall dividend tax rate and taxes on capital. Cutting the corporate tax rate can attract foreign direct investment (FDI). Cutting the corporate rate would lead to lower corporate debt and reduce the incentives for income shifting. Cutting the corporate tax rate can reduce compliance costs. Cutting the federal corporate rate can help the states compete globally.”
Congress needs to act fast. According to an April 4, 2012 op-ed in Reuters by Elaine Kamarck and James P. Pinkerton, “The U.S. in the dubious position of being number one in anti-competitiveness with a current combined rate of 39.2 percent. . . . combined corporate tax rate, and federal rate at 35 percent, leaves us in a weaker position relative to other leading economies.” Policy makers are working on a solution, but not fast enough. In February, Treasury Secretary Timothy Geithner proposed a plan to reduce the corporate tax rate to 28 percent and House Republicans have proposed a rate of 25 percent. Unfortunately, policy makers in Washington are not the only ones paying attention as Kamarck and Pinkerton point out our competitors are also taking notice, “Over the last 20 years, America’s competitors have lowered their top corporate rates to levels as low as 12.5 percent and 8.5 percent in the cases of Ireland and Switzerland, while the U.S. has not.”
Now is the time for policy makers to get serious and lower the corporate tax rate. Taxpayers cannot and should not be forced to continue to wait for a robust economic recovery. The U.S. cannot afford to lose any tools to attract business to its shores and having a high corporate tax rate is not a tool, but a vice.
INSIGHTS: THE UPS AND DOWNS OF STATE SPENDING
By John Dunham:
Managing Partner, John Dunham & Associates
“State, local spending at lowest point since ’80s” declared a headline in last week’s USAToday. According to the article, USAToday utilized available Bureau of Economic Analysis data and estimated that state and local spending is down 0.8%, or a 2.7% drop when adjusted for inflation, for an annual rate of $2.4 trillion. The article went on to report that special interest groups ranging from law enforcement to teachers to businesses are seeing their funding requests denied despite increasing tax revenues being collected by most states.
“We’re seeing some incredibly significant examples of groups not getting what they want,” says Scott Pattison, head of the National Association of State Budget Officers (NASBO). “There doesn’t appear to be that much pushback. Maybe there’s an acceptance that cuts have to occur.”
But wait. Wasn’t it NASBO that reported a few months back that state spending actually increased over the past three years? In their annual State Expenditure Report, NASBO finds that total state expenditures grew each of the past three years reaching $1.56 trillion in fiscal 2009, $1.62 trillion in fiscal 2010, and an estimated $1.69 trillion in fiscal 2011.
That begs the questions. Is state spending up or down?
It all depends on what numbers you are using. In the case of USAToday, unlike NASBO, they didn’t factor in the American Recovery and Reinvestment Act of 2009, otherwise known as “the stimulus bill.” Much of the $831 billion stimulus was distributed to state and local governments to use for infrastructure, education, health, and energy, federal tax incentives, and expansion of unemployment benefits and other social welfare provisions. In turn, as NASBO notes in its analysis, state spending increased during the 2009-2011 time period.
USAToday is right about one thing. While the federal stimulus is rapidly fading away, states and localities are still facing major fiscal challenges like underperforming general funds, rising health care costs and underfunded pension funds. With a reluctance to raise taxes in a still recovering economy, elected officials have no choice but to reduce spending and pass austere budgets.