A 20 percent Corporate Tax Rate Is Key for More Jobs and Higher Wages


Posted by Alexander Hendrie on Thursday, December 7th, 2017, 4:30 PM PERMALINK

Both the House and Senate versions of the Tax Cuts and Jobs Act reduces the uncompetitive 35 percent federal corporate tax rate to 20 percent – putting the U.S. in line with the corporate rates of the rest of the world.

Given this consensus, tax writers should ensure that the rate in the final tax reform bill is no higher than 20 percent. This competitive rate is key to stronger economic growth, higher wages, and more jobs.

A 20 percent corporate rate will mean more take-home pay for families across the country. As noted in a study released by the Council of Economic Advisors, a 20 percent corporate rate could result in household wages increasing by between $4,000 and $9,000.

A 20 percent corporate rate will create more jobs. In the increasingly global economy, it is clear that workers are more vulnerable to the high U.S. corporate rate. A high corporate tax rate means that capital will be relocated in a more productive way (i.e. to a country with a lower corporate tax rate). In other words, U.S. capital is mobile, while U.S. workers are not. According to research by the Tax Foundation, a 20 percent corporate rate will create almost 600,000 full time jobs.

A 20 percent corporate rate will make America globally competitive. The average rate in the developed world is around 25 percent, while the European rate is just 18 percent. When accounting for state corporate taxes, which average 4 percent across the country, a 20 percent rate would ensure the U.S. rate is in line with foreign competitors. Since 2000, 32 of the 35 developed countries have reduced their corporate rates. The U.S. is only one of two countries with a higher rate than in 1988.

A 20 percent corporate rate will end inversions and foreign acquisitions. The high rate has also resulted in close to 50 American businesses leaving the country through inversions in the past decade, according to data compiled by Democrats on the House Ways and Means Committee.

In addition, the high U.S. rate has made American innovation vulnerable to foreign acquisitions. According to a study commissioned by the Business Roundtable, the U.S. business climate is so uncompetitive that American companies have suffered a net loss of almost $510 billion in assets since 2004. The study estimates that a 20 percent corporate rate would have resulted in U.S. companies acquiring $1.2 trillion worth of assets over that same period, meaning that more than $1.7 trillion in assets were lost because of the uncompetitive U.S. rate.

Increasing the 20 percent corporate rate now will mean future increases in the corporate rate. In 1986, President Reagan reduced the top marginal income tax rate from 50 percent down to 28 percent. President George H.W. Bush increased this tax in 1990 to 31 percent, in the process breaking his promise to the American people that he would not raise taxes. Since then, President Clinton and President Obama have signed into law rate increases. Today, the top rate sits at 39.6 percent.

 

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