Corporations are paying a smaller share of federal tax revenue than they did in the 1950s, dropping from one-third then to only one-tenth of the total today. Yet, an army of lobbyists is pushing hard to convince Congress to cut the corporate income tax rate by nearly one-third — from the current 35% to 25%. This issue is at the epicenter of the coming battle over tax reform.
Conservatives have defined the debate in a highly misleading manner. They focus on the top statutory rate — the rate specified by law — instead of the effective tax rate — what is actually paid. Because U.S. statutory rates are somewhat higher than other OECD countries, corporations claim that this makes them less competitive, and that it stunts job growth. But their argument is unpersuasive when the debate focuses on effective corporate tax rates.
The debate has been further skewed by calls for “revenue neutral” corporate tax reform, in which any revenue raised by closing tax loopholes is used to reduce rates. Corporations haven’t contributed a dime towards deficit reduction in recent budget deals. And they want to continue this special treatment while American families shoulder the entire burden. Meanwhile, the country is starved for resources needed to foster economic growth and job creation — from infrastructure to research to improved schools.
The top statutory tax rate of 35% in the U.S. is somewhat higher than that of 30 other OECD countries, but the average effective tax rate — the actual rate paid after deductions and credits — is slightly lower than our competitors, according to the Congressional Research Service (CRS).
Several studies have found that U.S. corporations pay a similar or a lower effective tax rate — the rate actually paid — than corporations in other countries. For example:
Conservatives claim reducing the corporate tax rate will substantially grow the economy. But a cut in the statutory rate from 35% to 25% would increase economic output by less than two-tenths of one percent, according to CRS. Economic growth over the past 60 years has actually been stronger when corporate tax rates were higher, according to the Economic Policy Institute. U.S. corporate tax rates also are not hurting profits — before-tax and after-tax corporate profits as a percentage of national income are at post–World War II highs.
There is no relationship between cutting corporate tax rates and job growth, according to a recent study by the Center for Effective Government. Twenty-two of the 30 profitable Fortune 500 companies that paid the highest tax rates (30% or more) from 2008 to 2010 created almost 200,000 jobs between 2008 and 2012. The 30 profitable corporations that paid little or no taxes over the three years collectively shed 51,289 jobs between 2008 and 2012.
Those who want to cut the corporate income tax rate from 35% to 25% ignore that it will cost $1.3 trillion over 10 years, according to the Joint Committee on Taxation. They say that rate cuts will be paid for by closing corporate tax loopholes, but this will be extremely difficult given the power of the corporate tax lobby. Even if it was possible, there would be no new revenue for investments or deficit reduction. America can’t afford that.
Recent polling shows that the public feels strongly that corporations need to step up and contribute their fair share. For instance:
Drawn from Americans for Tax Fairness’ 2014 Tax Fairness Briefing Booklet.