This article is from Dollars and senses: Real World Economics, available at http://www.dollarsandsense.org
This article is from
March/April 2022 issue.
Dear Dr. Dollar:
It seems businesses are saying they need low tax rates to do research, innovate, invest and stay competitive. Why not take them at their word and offer them low taxes on specific terms? Say, a 10% tax on pre-tax profits that are used for research, capital investment, workforce development, etc., and something like 50% to 70% on the rest of their profits?
—Katharine Rylaarsdam, Baltimore, Maryland.
The problem is that corporations already get tax breaks as you suggest. The Tax Foundation, which, according to the organization’s website, prides itself on being “the nation’s leading independent tax policy nonprofit,” summarizes the situation as follows:
The tax treatment of different types of investments, such as those in research and development (R&D), physical capital and human capital [worker training], varies. R&D expenses are immediately deductible and eligible for tax credits. Many investments in physical capital are immediately deductible. Only certain categories of human capital investments are deductible for companies and individuals, and certain credits are available for individuals.
Thus, in general, offering corporations a low tax rate on the income they use for these productivity-enhancing activities would in effect present them with a higher rate of tax than they currently pay on expenses for these activities. This “offer” would certainly not lead them to accept a higher rate on the rest of their income.
There is, however, a well-founded question implicit in the proposal, namely, how to get companies to pay more taxes? The experience of the past decades, complemented by the corporate tax cut enacted at the end of 2017, has long been one of lower corporate tax rates and a declining revenue share federal from corporations.
In the 1950s and 1960s, the federal statutory corporate tax rate hovered around 50%, but today it is only 21%. After slight declines in the 1970s and early 1980s, the rate fell to 34% in the late 1980s. It then remained stable at 35% from 1992 to 2017, when the sharp reduction to 21 % has been enacted. The average effective rate, what corporations as a group actually pay, is significantly lower than the statutory rate, as corporations find many ways to reduce their taxes, for example, the types of deductions and credits noted in the quote from the Tax Foundation above. There are also “loopholes”; a particularly important factor is the possibility for companies to locate their profits abroad, often through accounting manipulations. (The “average effective rate” includes some businesses that pay no tax and some that pay more; there may be some that actually pay the statutory rate!)
The table on the right shows the average statutory and effective tax rates from 2015 to 2021, along with the amount of corporate profits and the share of total government revenue accounted for by corporate income tax. (Don’t miss that pre-tax corporate profits for the first three quarters of 2021 were 31% higher than any previous year, far more than would be explained by inflation.) The chart below that shows what has happened to the law rate, the average effective rate and federal corporate tax revenue as a percentage of total federal revenue since 1952.
These data indicate the importance of finding an answer to the question of how to get companies to pay more taxes. Business leaders and their apologists will say that low taxes help the economy grow. A look at the graph below, however, indicates that there is no connection between periods of strong growth and low corporate tax rates. What the tax cuts have done, however, is contribute to the sharp rise in economic inequality.
The experience of corporate tax rates demonstrates the power of large corporations and wealthy individuals. But that power is wielded in many other ways, from tax breaks for fossil fuel companies to the deregulation of finance to weakening the strength of unions, all of which contribute to rising inequality. (See Arthur MacEwan, “Are Taxes the Best Way to Deal with Inequality?” D&S, November/December 2019.) The answer to the question of how to get corporations to pay more taxes is tied to the larger question of how to reduce corporate power. I have no answer to this question other than the old answer of political organizing – through unions, community groups, student organizations and the like – to overcome the great power that big business operate in our political system.
Erica York, “Tax Treatment of Worker Training,” Tax Foundation, March 21, 2019 (taxfoundation.org); Thomas L. Hungerford, “Corporate Tax Rates and Economic Growth Since 1947,” Economic Policy Institute, June 4, 2013 (epi.org).