At first blush, advocating for lower corporate taxes like Republican candidates Herman Cain and Rick Perry looks like the kind of policy that corporations would salivate over. As conservative pundits like to point out, the United States already has the second-highest statutory corporate tax rate of all developed countries and that it stands alone in its attempt to impose taxes on the global income of its own corporations. The complexities of our tax code also encourage American multinational companies to shift more of their business abroad. And as businesses move away, American jobs move with them. Lowering corporate taxes would keep those jobs here at home and invigorate our economy. Everyone would win, right?
Not so fast. In addition to being significantly regressive for lower class individuals, the flat tax plans may also create problems for corporate interests. To understand why, consider the specifics of the candidates’ proposals: Mr. Cain’s “9-9-9” plan calls for scraping taxes on corporate profits, payroll and capital gains in favor of flat 9 percent tax on income, business and national sales. Mr. Perry’s “Cut, Balance and Grow” strategy would lower the overall corporate tax rate to 20 percent. Both candidates seek income neutrality by phasing out loopholes and special-interest tax breaks. Perry’s plan also advocates a move to a territorial system that only taxes in-country income.
Why should business interests hesitate before endorsing either of those schemes? First, the savings businesses would enjoy may only be skin deep. While the current statutory corporate tax rate is higher than most industrialized nations, the tax code as it is currently written actually allowed several major corporations, like Bank of America and General Electric, to pay zero taxes last year. In addition, off-shore banking regulations and legal accounting strategies result in a real corporate tax rate that is among the lowest in the developed world. Presumably, these enjoyments go out the door if the Republican candidates keep their word on the details of their plans.
A second, larger problem is that lowering corporate tax will create significant problems for public infrastructure that corporations depend on. The rise of globalization and attractive financial opportunities in emerging countries like China, India and Brazil has created what some are calling a race-to-the-bottom with regard to corporate taxation. The thinking is simple: In order to compete in the new global playing field, states must keep cutting taxes relative to others in order to attract global capital.
Lowering taxes in this country puts more fuel in the race-to-the-bottom engine. As other countries begin to mimic this strategy, it will deplete funding for public works projects that benefit private businesses. In particular, developing nations who are still in the early stages of creating infrastructure will be forced to either stop competing for multinational firms or stop building. Corporations, therefore, will likely be left with a smaller pool of countries in which to do business in, and will have to take it upon themselves to fund infrastructure they find necessary. The detriments are all foreseeable, and if the race continues, businesses will be forced to slow down expansion. Trade relationships will change, production costs will rise and the global economic pie will shrink.
This problem is especially relevant in the United States. Large businesses benefit greatly from public entities like education, energy and administrative regulation, where they enjoy a seat at the table in crafting policy. Inevitable cuts to all three of these sectors would create an environment of uncertainty which would result in more conservative corporate spending. Tax policies should be favorable to business, and part of that includes encouraging modest, calculated risk.
Elected officials should seek to craft a tax policy where corporate and individual rates are reformed in tandem with one another. Lowering both corporate and individual tax simultaneously likely creates a scenario where neutrality is impossible without significant cuts to public works that corporations depend on. The proposal should at least be revenue neutral and seek to grow the global economy, which will ultimately leave the United States in better financial shape.