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Corporate Tax & the Case for an Increase

In the world of tax, including corporate tax, change is a foundational concept. We see it constantly .  The Tax Cuts and Jobs Act of 2017 was no exception.  Deductions which were formerly available are suddenly unavailable.  Individual brackets which seemed perfectly stable are modified.  Loopholes, at least some of them, close as the Internal Revenue Service gets wise to them. Looked at from a long-term perspective, we see that tax rates, rules and regulations are constantly in flux.  Policymakers attempt to address and readdress the needs of both the government, and society as a whole. One of the most common issues among those who develop our tax system is about appropriate tax rates.  That is, rates for unmarried individuals, heads of households, married filing jointly, businesses, estates, etc. Whether they should be increased or decreased.

Policymakers have to walk a narrow path.  That involves both satisfying the interests of the taxpayers and also a government that makes our commercial environment even possible. 

The National Debt is a Big Factor

One of our federal government’s major concerns is our national debt. Whether any given policymaker chooses to acknowledge it, our growing debt informs our tax system to a large extent; this is inescapable as tax revenue figures prominently into the process through which our debt crisis will be resolved. For this reason and others, the question of whether the federal corporate tax rate should be raised from its present rate has come up more and more frequently in public debate. Predictably, the issue has generated a wide assortment of perspectives.  Some feel that an increase is necessary to lower the debt and to ensure the businesses pay their fair share.  Others believe that higher corporate tax rates would actually have a negative impact by dragging down employee wages. Let’s take a look at both sides of the complex corporate tax issue in this blog post. 

The Case For a Corporate Tax Increase

One argument is that an increased corporate tax rate will generate more revenue to service the national debt.  This in turn, helps keep our federal government functioning properly.  Another is that an increase is justified because many businesses already find ways to lower their tax burden.  Some of these ways may be ethically questionable. It’s not uncommon for large corporations to shift profits overseas, as we’ve discussed in an earlier blog post, in order to avoid the corporate tax until favorable policy changes make it desirable to bring them back. What’s more, corporations also benefit from numerous deductions and write-offs.  They reduce their effective tax rate to a figure significantly lower than the statutory federal rate. If we raised the rate, supporters contend, many business entities would simply end up paying approximately what they should have already paid without any creative accounting or questionable maneuvering. 

If someone chooses to conduct the necessary research, it’s difficult not to find this argument at least somewhere convincing. Many major U.S. corporations have an effective tax rate which is exceedingly low when you consider their revenue and overall market positions. In fact, along with raising the federal rate, it may also be desirable to remove some of the tax perks currently available to corporate entities in the tax code.  

The Opposition to a Corporate Tax Increase

Probably the most persuasive argument against the position that the federal corporate tax rate should be increased is the notion that such an increase will end up being absorbed primarily by employees. Indeed, one of the primary arguments used by the Trump administration when the corporate tax rate was reduced in the Tax Cuts & Jobs Act of 2017 was that this reduction would directly translate into greater household income.

Rationale For Lower Corporate Taxes

The reasoning is that lower corporate taxes leads to higher investment.  That’s because shareholders shoulder a reduced tax burden when they collect their profits; this higher investment then leads to greater productivity, and then this improved productivity eventually leads to higher wages for employees. The problem with this reasoning, however, is that there is not a whole lot of direct, empirical evidence to support it. It is questionable, for instance, whether lower corporate taxes will necessarily lead to higher investment. Many of the firms which would be the recipient of the lowered tax rates already have a history of generating healthy profits for their investors, so the argument that lower after-tax profits are negatively impacting investment appears to be weak when viewed in light of this fact. There’s also no certainty that greater investment won’t simply mean heavier expenditures on research or automation.  

Ultimately, the side on which a given person finds themself depends in large part on how the issue itself is framed. If the goal of tax policy is to settle the greater problems a state faces, then increasing the federal corporate tax may be desirable, as the state may end up taking in more revenue. But if the goal is to raise incomes for workers, then decreasing corporate taxes starts to seem like a more viable alternative.  Either way, as we’ve discussed, more evidence is needed to support the associations between lower corporate taxes and higher employee wages. 

New York City Tax Attorneys Can Help

As tax and business attorneys, the professionals at Mackay, Caswell & Callahan, P.C. make it their mission to stay on top of cutting-edge issues in their field. The debate surrounding the federal corporate tax rate is just one of those issues. The better educated we are regarding these issues, the better we’re able to serve our clients. So, if you have a tax or business issue and you need assistance, call a New York City tax attorney a today and we will get started on your issue right away. 

Image credit: Mike Cohen