The marginal tax rate on corporate profits in the United States is 35 percent. As President Donald Trump and other proponents of tax reform continually say, this is the highest rate in the world. This is true — but also incredibly misleading.
Due to loopholes, the actual tax rate on corporate profits is close to 20 percent, putting the U.S. right around the middle among wealthy countries.
This numbers-versus-reality gap should be kept front-and-center in the debate over reforming the corporate income tax. If someone argues that U.S. corporations pay too much in taxes, they are not being honest.
Corporations in countries like Germany and the Netherlands pay a comparable share of their profits in taxes. High taxes are not putting our firms at a competitive disadvantage.
Furthermore, as a matter of simple arithmetic, if our corporations pay less in taxes, the rest of us will have to pay more.
Yes, Republicans promise us tax cuts will lead to a surge of investment and growth, but we’ve heard this one before. It didn’t happen when we had big tax cuts under Ronald Reagan and it didn’t happen when we had big tax cuts under George W. Bush.
In both cases, the deficit surged. If there was any positive impact on growth, it was too small to notice and certainly not enough to offset the impact of the tax cut.
The lesson from these prior experiments is that tax cuts lead to less revenue, which means larger deficits. Many of the same people now pushing for tax cuts will start screaming about large deficits when we see a fall in revenue.
This leaves two options: cutting spending or raising taxes on the rest of us. Neither of these prospects looks good for people who don’t own lots of stock in corporate America.
Cutting waste is always popular, but the reality is that there is not much waste sitting there waiting to be cut. The spending that will be slashed is for areas like Social Security, Medicare and Medicaid, programs that have already shown up on the Republican hit list.
There is an alternative route that is more worker-friendly. Corporations are able to reduce their tax rate from the legislated 35 percent rate to the actual rate of 20 percent through a wide variety of tax avoidance measures. Many people also get very rich from developing tax avoidance strategies, including many in the private equity industry.
These tax avoidance strategies are a complete waste from an economic standpoint. We want people to make money by developing better products and services, not from devising creative ways to beat the IRS.
If we had a tax reform that raised roughly the same amount of revenue but largely eliminated the opportunities for tax avoidance, this would be a clear winner for American workers. In this case, more resources would be devoted to productive investment rather than gaming the tax code.
It is possible to design a tax reform along these lines. My favorite route would be to require companies to turn over non-voting shares in an amount equal to their tax liability. These shares would give the government no control over the company and would be treated just like regular shares.
If the company pays a $2 per share dividend, the government gets $2 on each its shares. If the company buys back 10 percent of its stock at $100 per share, it pays $100 for each share of government stock. This way, there is no way the company can cheat the government without also cheating its shareholders.
This sort of reform would be a good for the economy and good for the nation’s workers. For this reason, unfortunately, it probably will not go very far in Washington.
Dean Baker is a co-director of the Center for Economic and Policy Research in Washington, D.C. Readers may write him at CEPR, 1611 Connecticut Ave. NW, suite 400, Washington, D.C., 20009.