Abacus: Hitting the Brakes on Corporate Tax Cuts
Nora Sahinun / EyeEm
The government debt at the moment sits at around $85,000 per citizen in the United States. At $28 Trillion, and climbing, the annual deficit has been a topic long ignored and pushed aside by lawmakers. This gap shows no signs of slowing down. The last time the government ran a surplus was 20 years ago. In 2020, government revenues were roughly $3.4 Trillion while spending was almost double at $6.5 Trillion. This massive deficit has ties to the pandemic, where economic stimulus packages increased spending without a doubt, but many have pointed to the reformed tax policy, instilled under former President Trump, as the catalyst for such a massive deficit.
Under the Trump tax plan, which saw a decrease in the corporate tax rate from the Obama policy (a tax cut for corporations from 35% to 28%) to 21%, the deficit increased significantly due in part to the fact that 55 of the nations top corporations paid $0 of federal income tax in 2020. While Trump was certainly criticized for his policy, the sustained lowering of corporate tax rates has been a tenant of US macroeconomic policy for decades now regardless of which side of the aisle one lies as there have been sustained tax cuts since 1950. The debate between a trickle-down economic system and a tax and spend approach has often been heated. But evidence has begun to point to the confounding effects of the increasing national debt, wealth inequality, and falling tax revenues as significant indications of a misstep somewhere along the way.
Under the Trump tax plan, twice as many companies paid $0 in federal tax than under the Obama plan. Amazon, while profiting nearly 10 billion, paid nothing in federal income tax. This fact not only outlines one of the key reasons why the deficit has seen sustained growth, due to falling government revenues, but speaks to the favorability large companies have had in the eyes of lawmakers. While lobbying has been an important force in maintaining these sustained tax cuts, allowing corporations and the wealthy who are seen as job creators to benefit from the tax code to continue to benefit from legislation without review has also helped to ensure that these cuts are seen as important drivers of growth.
The timing of the tax cuts of 2017, along with the historically low interest rates at the time, did little to improve upon the already significantly friendly environment for corporations. Beyond this, the reasoning behind the cuts, revolving around bringing businesses back to America, is a bit flawed when evaluating that, while the US tax rate is high, it is only a half % larger than the average rate among rich countries. Important studies by the Economic Policy Institute indicate that corporate tax cuts do not spur economic growth nor is the inverse true, as high corporate tax rates have no negative impact on growth. This fact seems to be the driving force behind the new infrastructure plan unveiled by President Biden’s Economic team last week.
The Biden administration announced a plan Wednesday that would see the corporate tax rate increased in order to raise nearly $2.5 Trillion in revenue over the next 15 years. The plan also includes tax incentives for clean energy production. The fact of the matter is that public goods go unfunded by the private market. Roads are arguably our nation’s most important piece of infrastructure. Our nation does business via interstate travel, and yet our highways go unfunded. Treasury Secretary Janet Yellen commented on this saying, “ Our tax revenues are already at their lowest level in generations. If they continue to drop lower, we will have less money to invest in roads, bridges, broadband, and R&D.”. Beyond the benefits to infrastructure, the improvements to which will be sure to spur economic growth, helping to cut transportation costs and increase production efficiency, the tax increases are sure to help contain spiraling income inequality.
In a study undertaken by Harvard Business School, it was found that corporate tax cuts resulted in a rise in income inequality. One of the main mechanisms behind this rise was the ability of wealthy individuals to shift the income to businesses, overseas, or US tax-havens. In effect, tax cuts for corporations are less effective because wealthy entities and persons are more likely to save the money hold on to from the tax cuts. This is opposed to tax cuts to the middle class or the poor that increase consumption and help the economy grow.
This process of offshoring profits has been detrimental to not only tax revenues but the validity of tax code revisions. Janet Yellen has also spoken on this, proposing a worldwide corporate flat tax rate to de-incentivize the system of hiding profits. While the Biden tax plan is an important step in correcting the dangerous freefall corporate tax rates have seen, ensuring corporations are paying their share, and moving that money towards the public good is essential. Even as the debate between these economic ideologies continues, the general public has seemingly made up its mind. Almost 63% of Americans support the proposed increase to the corporate tax rate.
