It’s generally best to speak to experts when making broad claims about national policy. For instance, if we want to analyze U.S. corporate tax policy it’s probably best to take the word of a few tax attorneys than, say, a constitutional law scholar. A new study by Jonathan Sallet and Robert Rizzi, partner attorneys in the tax practice of O’Melveny & Myers LLP, highlight the constricting nature of corporate tax rates. ATR has previously highlighted the job-killing nature of high corporate taxes and the anti-growth effects of maintaining the highest corporate tax rate in the industrialized world. Published by the RATE Coalition, Sallet and Rizzi’s white paper analyzes the nature of capital mobility, the effects and incidence of high corporate tax rates and how to approach tax reform that encourages business rather than stifling it.
The advent of online trading, electronic banking and digital transfers has made money more mobile than ever. This also means businesses are more aware and influenced by tax rates when deciding how to treat capital. According to Sallet and Rizzi, “A recent Ernst & Young report has noted that increased globalization has led to greater capital mobility. The free flow of capital also makes it more sensitive to tax treatment.” Higher corporate tax rates incentivize businesses keeping money, jobs and factory investment overseas where rates are lower. While Sallet and Rizzi are discussing corporate taxation, it’s worth noting that the nature of capital gains taxes in the United States likely exacerbates the perverse incentives that come with the highest corporate tax rate in the OECD. In short, businesses don’t innovate or invest in America because the returns on such investments—profit—are taxed lower in Japan.
Proponents of higher taxes on businesses claim that the top marginal rate only affects a handful of large businesses. Let’s ignore, for a moment, the fact that this argument doesn’t refute the principle that high taxes cause corporations to create fewer jobs on the margin. Sallet and Rizzi found that,
Most U.S. corporations pay the top rate of 35 percent on their marginal income, close to that rate on their overall profits, and they are more likely to be smaller corporations. But research has demonstrated that it is small and midsize businesses that drive economic growth and that are out-sized creators of jobs.
It’s easy to conjure up images of ExxonMobil, Apple and Microsoft when talking about the highest corporate tax rate, but small businesses are likely to fall into this top bracket. The taxable income level at which the top rate hits smaller corporations is $75,000. You don’t need to be a big company at all to face the corporate income tax top rate. Small businesses, which drive economic growth and embody the American dream, are hit by these taxes. Meanwhile, other nations lower their corporate rates to attract entrepreneurs and incentivize growth while President Obama proposes a tax credit that small businesses will never use.
Sallet and Rizzi mention 25 percent as an acceptable corporate rate since it’s the OECD average. ATR believes 20 percent is better since American businesses face state corporate tax rates in addition to the federal rate. Regardless, we agree with Sallet and Rizzi conclusion that lowering corporate taxes to a level, “More consistent with rates across the industrialized world would be good tax policy and good innovation policy as well.” It’s time we listen to the tax law experts instead of the constitutional scholars, especially those that can’t understand the nature of judicial review.