The Impact of Corporate Tax on the United States Economy - Essay Sample

Introduction

Corporate tax can be described as the assessment levied by the federal government on the profits of a business entity or a company. As it is, the rate of corporate tax paid by businesses varies between nations, and since corporations are legal entities different from their operators and owners, they are taxed as if they were people. The federal corporate rate is significant for the growth of the US economy because all investment decisions of the corporations are influenced by the effect of the tax rate on the return rate of a project. For instance, in the case that the after-tax rate of return does not meet the expected investment return rate, the project will be abandoned. Also, corporate tax rate influences where multinational companies decide to invest in new productive capital. For instance, increased investment in the US raises the overall capital stock as well as the technology level available to businesses; therefore increasing the productivity of US workers as well as their real wages. High income allows individuals to save more, and the savings are channeled back into the corporations, continuing the positive growth cycle (Chalk, Keen, & Perry, 2018). As such, this argumentative paper seeks to answer the question of what is the impact of corporate tax rates on the economy of the United States. In doing so, the paper will provide arguments for both lowering and increasing the corporate tax rate.

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Discussion

Throughout the history of America, the proposal of reducing the corporate tax has been debated on whether it will lead to increased job creation or not. The ones in support of reducing the corporate tax rate maintain that it will result in job creation within the country as an alternative of outsourcing abroad. They also argue that lowering the rate will result in increased wages, as well as more benefits to US workers. However, the opponents of reducing the corporate tax rate provide that this will only lead to increased profits to business entities without any effect on job creation. The opponents also argue that lowering the corporate tax rate will raise the American deficit and that business entities hire employees depending on how much workforce they need, but not as a result of the corporate tax rates. The US has one of the highest corporate tax rates globally, which has disadvantaged the domestic corporations. Therefore, reducing the corporate tax rate will act as an incentive to the US to create more jobs domestically instead of abroad. The augmented amount of revenue remaining will be channeled back to the corporations and new ventures, leading to more jobs being created as well as more benefits to the workers.

Another major concern with high corporate tax rates is the worry that business entities will relocate overseas, where the corporate tax rates are lower. Before President Trump issued corporate tax cuts, American corporate tax rate was one of the highest globally. This high tax rate had in the past forced American corporations to relocate their operations as well as employees overseas. This is evident for example with Johnson Controls, an American company that have a market value of approximately $33 billion, which moved its operations in 2016 from Milwaukee, Wisconsin to Ireland due to the corporate tax differences between the US and Ireland. Economic analyzers reported that a spokesman from the company sent an official communication to the employees stating that the move to relocate the company's major operations will save the company approximately $150 million in American taxes yearly. The management of the company justified their decision by stating that moving their operations overseas would help them "retain maximum flexibility for their balance sheet as well as their capability to invest in growth openings everywhere across the globe" (Auerbach, 2018). Corporations already want to relocate overseas to access cheap labor; therefore, keeping on to increase the corporate tax rate will only cause more entities to relocate to sustain their profitability. Lower tax rates, on the other hand, will entice corporations to invest more within the US and create more jobs. As earlier discussed, increased investment in the US raises the overall capital stock as well as the technology level available to businesses; therefore increasing the productivity of US workers as well as their real wages.

Lowering the corporate tax rate would make investing in the US attractive, both by domestic as well as international firms. Lower rates offer an incentive for foreign businesses to invest in the US. The dynamic simulation demonstrates that foreign assets in America would increase significantly by an approximate average of four percent per annum. Reduction of corporate tax rate would likely lead to more business activities with increased investments in new, value-creating projects since the barrier brought about by the higher corporate tax is reduced (Heinemann et al., 2018). Also, lowering the corporate tax rates assist in minimizing distortions in financial markets as well as bringing about a more efficient mix of debt and equity. Corporations finance their investments either by selling ownership stock or shares (equity) or issuing debt (borrowing). The corporate tax tilts the choices of corporate financing toward debt financing; since a part of the cost of debt is offset by the benefit of subtracting the interest expense, lowering the entity's tax liability. Allowing the gap between debt and equity financing to be decided based on existing economic fundamentals sends a clear investment price signals, transmitted across the actual economy and are crucial for all economic activities.

Another erroneous belief that people maintain is that corporate tax rate has no influence on corporations hiring workers, but rather their workforce needs are the deciding factors. According to a study by MacKieMason (1990), a reduction in corporate taxes does not incentivize corporations to hire more employees so as to produce more, but their productivity depends on their capacity to sell more products. However, this belief discredited another study by Lee and Gordon (2005), which found out that a corporate tax cut corresponding to 1% of the GDP would raise the overall GDP by 2% to 3%. Applying the opposite of this by increasing corporate tax by 1% of GDP, then the overall GDP would be decreased by approximately 3%. An increased GDP translates to growth in economy, leading to creation of jobs since corporations earn more profits; therefore have more to invest in new ventures and expanding current businesses (Djankov et al., 2010). As corporations make more money, the extra is channeled back into the business hence continuing the positive growth cycle.

The proponents of increasing corporate tax rates also argue that the government legislation that lowered corporate tax rates resulted in corporations dismissing workers. They also argue that such legislation benefits the rich shareholders of the companies but not the employees. It is believed that the extra revenue resulting from corporate tax cuts would go to the pockets of the shareholders but not the employees of the companies. A study by Ljungqvist and Smolyansky (2014) found out that only thirteen percent of corporate tax cuts would be channeled to the benefits of workers while forty-three percent of the tax cuts would benefit the already rich shareholders. According to the study, the remaining percentage of the tax cuts would be channeled back to the companies for expansion and new ventures. After the adoption of President Trump's Tax and Jobs Act of 2018, it is believed that US corporations distributed over $172 billion of benefits to shareholders and only $5.6 billion for the workers and employees. However, some analysts disagree with these claims stating that within three months following the adoption of the Act, over three hundred and seventy corporations credited the new tax Act by announcing increases in employee tuition assistance, bonuses, as well as overall wages. The main outcome of this Tax Cut Act is the increase in employee benefits and the reduction of the unemployment rate (Ljungqvist & Smolyansky, 2014).

The supporters of reducing corporate tax also maintain that lowering the corporate tax rate results in the growth in the economy and the subsequent creation of jobs. Their argument is based on the assumption that corporations would have more money to invest in new ventures and assets. This argument is also backed by the Tax Cuts and Jobs Act that was intended to lower the federal corporate tax rate from 35% to 21%; therefore lowering the American combined rate from 38.9% to 25.7%. This Act would position the US slightly above the OECD average of 24%, but slightly below the average regarding GDP. Nevertheless, Miller (2017) recently carried out a study to find out if this tax break will have a major impact or not. He concluded that lowering the corporate tax rate can trigger economic growth only if the existing rate is extraordinarily high. However, because many corporations have found ways to circumvent paying the full 35%, Miller states that the overall economic impact of reducing the corporate tax rate to 21% would be less dramatic considering that many corporations already have ways of avoiding to pay the full amount of taxes required of them. While Miller is unconvinced about the actual impacts of this tax break, as provided by the Tax Foundation's Taxes and Growth Model, the combined impact of the overall changes in the Tax Cuts and Jobs Act will result in 1.7% growth in the American economy. The 1.7% increase in the US economy would subsequently result in 1.5% increase in wages, 4.8% increase in stock capital, as well as the creation of additional 339,000 full-time jobs in the long run. Based on these findings, lowering the corporate tax rate would be likely to result in job creation as well as increased employee benefits (Miller, 2017).

A common misconception held by most people is that companies bear the cost of the corporate tax. Nevertheless, a growing body of literature shows that the actual burden of the corporate tax is split between the owners of the corporations and workers through lower wages. As capital reduces due to high corporate tax rates, employee wages and the productivity of the corporations reduce. Experimental studies have demonstrated that labor bears between 50 and 100% of the corporate tax burden. Lower corporate tax rate fuels growth in the overall size of the company, jobs, wages, as well as capital stock. The tax rate also affects economic decisions. When corporations think about investing in a new capital good, they sum up all the costs of doing so, including taxes. High taxes results in a high cost of capital; therefore less capital that can be created and employed. As such, a higher corporate tax rate lowers the overall capital stock as well as the overall size of the economy. On the other hand, reducing the corporate tax rate incentivizes investment, increasing the capital stock (Miller, 2014). The figure 1 below is a representation of how lower corporate taxes increase employee benefits.

Figure 1: How lower corporate taxes increase employee benefits

Conclusion

In America, the proposal of reducing the corporate tax has been debated on whether it will lead to increased job creation or not. The ones in support of reducing the corporate tax rate maintain that it will result in job creation, increased wages, as well as more benefits to US workers. The opponents of reducing the corporate tax rate provide that this will only lead to increased profits to business entities without any effect on job creation. High corporate taxes can cause companies to relocate overseas. The tax...