Why You Should Care About Corporate Tax Rates

Posted by Kristie Shu on Friday, June 7th, 2013, 11:40 AM PERMALINK

The New York Times recently called for higher corporate taxes to resolve tax revenue losses, and encouraged Congress to implement the European Union’s model of full company disclosure.

While corporations can wield enormous and sometimes worrisome amounts of power, there is a difference between encouraging corporate responsibility and transparency, and slapping corporations with a double taxation burden (which would be the effect of the NYT policy.)  Double taxation removes hefty sums of capital that could otherwise go to improving standards of working, and subsequently standards of living for middle-class Americans everywhere.   As you’ll see below, US companies are subject to international double taxation that other nations simply don’t impose.

The Times failed to address the EU’s current average corporate tax rate of 22.74%.  The rate was 25.01% in 2006, and has been gradually decreasing ever since.  Furthermore, 20 of the 21 EU countries (excluding Ireland) use territorial tax systems.  In a territorial tax system, foreign earnings are taxed only once—at the rate of the country where revenues were produced.  America’s worldwide taxation system creates double taxation, and makes America uncompetitive in the global market.  Over 90 percent of the Forbes 500 OECD-companies, all American competitors, are in countries with a territorial system. 

Without a repatriation system, where companies can bring income back to the US by exclusively paying the income tax where the revenue was generated, the US is at a disadvantage in the international economy.  America currently loses market share around the world because foreign companies have bigger tax advantages.  Exports are down because most sales today are to foreign subsidiaries, and fewer exports lower the employment demand.

But why should you care about helping these corporations?

Corporations provide benefits, control your 401(k)/pension funds, and in turn provide you with the means to start a family.  If corporation revenues return to America, you will have access to a more robust job market, with competitive wages, higher defined benefits, and stronger pension plans.  A higher standard of living is inevitable. 

Contrary to The Huffington Post’s claim that lower corporate taxes would not benefit the economy, the 2004 American Jobs Creation Act (AJCA) illustrates the success of repatriation.  The AJCA decreased repatriation tax on foreign subsidiary earnings from 35 percent to 5.25 percent.  In one year, US companies brought back $362 billion out of roughly $804 billion overseas income.

Though there is no way to measure how companies allocate their income, a certain amount is allocated to improving labor policies.  With hundreds of companies returning the US, corporations will have no choice but to implement fair wages, competitive pension plans, and healthcare benefits.  Corporations can also freely invest in capital and pay off domestic debt to improve their reputations and acquire more talent.  Extra resources allow companies to devote more energy to improving diversity, workplace fairness, and community involvement as well. 

These steps create a stronger, more appealing company that can ultimately attract more customers and yield more revenue.  Again, more revenue in the company’s hands means more revenue to be shared with American workers.       

All companies are profit driven, but free markets would align the labor-friendly and socially responsible corporations at the top of the revenue ladder.  Corporations have fixed allocations of capital that must go towards improving labor.  With a plethora of companies returning to the United States, attracting employees would be critical.  Labor market competition would dictate the behavior of corporate executives, who would find that transparency, diversity, and competitive benefit programs create a desirable and popular work environment.  The Chamber of Commerce found that less than 10 percent of AJCA’s repatriated cash went to executive compensation.  

This market-induced efficiency is possible without labor unions; in fact, unions would hinder the process.  Motivated corporations are perfectly capable of providing optimal fair and safe work environments without pressure from third party groups who are unfamiliar with the corporation’s culture and policies. 

When an economy is free of hurdle impediments, it will produce efficiencies.  These efficiencies, in the form of greater capital, will provide the average American with more robust retirement plans, more accommodations such as parental leave, and more inclusive healthcare benefits.  When the government intervenes in the affairs of capable companies, they are imposing a superficial system of generating revenue.  These taxes could have otherwise have gone to pension plans and health insurance for internal employees. 

A low repatriation rate coupled with a territorial taxation system would bring back the revenues of 769 companies, including Apple and ExxonMobil, which have market values of more than $568 trillion and $405 trillion respectively.  This surge of income would solve revenue losses and debt far more effectively than a punitive tax would.  Companies could spur a new workforce generation, creating billions of jobs and rapidly reducing unemployment numbers. 

Our concept is simple: leave corporations alone.  They possess the ability, more than any government mandate, to cure the crippled, messy economic situation Americans face today.