The US Economy and The Corporate Tax Rates
If it were not for corporations we would have no economy. That seems very intuitive to most people. So the next logical progression would be how do we allow corporations to operate and thrive in our economy?
Basically, there are two areas of concern in answering this question.
- Corporate tax rates
We will only deal with corporate tax rates for now.
Corporations exist to provide a product or service to make a profit.
This is the foundation. They do not exist to give people jobs. Jobs help a corporation provide the product or service to create profits.
The more money a corporation can retain, in theory, the more capital they will have to create more innovation, new directions and more employment to people.
The less money that corporations can retain the less they can accomplish all of the above.
Now that I have the obvious stated so succinctly, let’s look at what is known as the Laffer Curve. The reader would be well advised to learn about this theory.
Basically, if a corporation is taxed at zero percent then the government gets no revenue from that corporation.
If the corporation is taxed at one hundred percent, then the government still gets no revenue because the corporation will cease to exist or move operations out of the country.
Consequently, there is an optimal tax rate that corporations can tolerate and that will maximize revenue to the US Treasury. The trick is to find that optimal point.
This concept also goes down to the individual. The more they are taxed for their hard work, the less hard work people will wish to do. The less they are taxed, the more hard work they will do and the result is more revenue for the government.
To understand this properly, efficient taxation is at the optimal point on the Laffer curve for both the corporation and for individual workers.
Although the Laffer curve theory was first presented in 1974 by a senior member of President Ford’s administration, it was President Ronald Reagan in the 1980’s that implemented the idea.
By reducing corporate tax rates to historical lows, in less than eight years the corporate tax revenue approach nearly doubled. We are talking here from $517 Billion to $909 Billion.
To keep the field of play fair for all corporations to compete the US Government should not play favorites or threaten one corporation to do its bidding while showing favor to another corporation.
I do have mixed emotions about the recent deal that was created by President Elect Donald Trump and Carrier Corporation.
It is not a good example of government keeping corporate tax rates down as it was based on a threat to move operations out of Indiana. But then again this is only my opinion. History will surely tell us one of these days if this approach will work and I certainly hope it does.
As far as I am concern, a much better approach will be to once again, across the board and across all industries reduce corporate tax rates to maybe even historical lows from the President Ronald Reagan years.
We can all agree that the growth in our GDP from 2008 to 2016 has been sluggish at best. Implementing an across the board corporate tax rate cut would most likely open the door to an explosion in economic activity, creativity, and even more revenue to the US Treasury.
In addition, lowering the corporate tax rates could very easily repatriate the trillions of corporate dollars that are sitting idle overseas.
Capital or money works best when it is flowing through an economy, not sitting in a holding pattern.
We can only trust that the incoming President Elect Donald Trump will have the insight to persuade Congress to pass lower corporate tax rate legislation.