Set-up: The United States charges a corporate tax rate of 35%, making it the second highest corporate tax rate in the world.
McCain's plan: Reduce that tax rate, marginally, to 25%.
Obama's plan: Close corporate tax loopholes to ensure American corporations pay the most possible tax and spin things by saying McCain wants to give Big Oil another $400 million in tax cuts (a natural default by cutting corporate tax rates for everyone).
Result: Think about it this way: if you're in charge of General Motors, and you suddenly have 10% more money for your business; is that better or worse? Is it now easier to hire more workers, give raises, pay down your debt, expand your business, and invest in alternative fuel-run cars? Or is it now more difficult? Additionally, if you're trying to expand a slowing economy, stimulate growth, spur on alternative transportation, and create jobs, wouldn't it be wise to cut the taxes of the people who do all of those things really well?
In case you're thinking "that is nice in theory", look to Ireland as proof that it works. 20 years ago, Ireland had one of the most stagnant economies in Europe (technically, the second lowest per-capita GDP). In order to better compete, Ireland lowered its corporate tax rate to 12.5%. The result: today Ireland has the second largest per-capita GDP in the European Union. Interesting, but some would argue that is Europe and we're the United States, we're strong even WITH the taxes being high. Well consider this: compared to the United States, Ireland raises 50% more corporate tax revenue. That is while their tax rate is 22.5% less than ours (US=35%, Ireland=12.5%).
The natural question is, if cutting taxes raises MORE money for the government, what happens when you RAISE taxes?
great quick-hit! i'm forwarding this on to my open-minded friends, thanks Dan.
ReplyDeleteThe main problem with this idea is that when spending is out of control, including close to a trillion dollars to rescue banking firms, the government cannot talk about cutting anyone's taxes. You just can't cut taxes and increase spending.
ReplyDeleteCorporate tax rate is just one piece of the puzzle. Other factors like property taxes, income taxes, consumption taxes, need to be considered when comparing our tax to other countries.
ReplyDeleteFrom Wikipedia:
On an individual basis most people are taxed through the Pay As You Earn (PAYE) system, based on their ability to pay - the system is quite progressive with little or no tax on low earners and a high rate applied to top earners. For businesses, tax rates are among the lowest in the world with many firms enjoying corporation tax rates of between 10% and 12.5%. A large amount of central government tax revenue is derived from value added tax (VAT), excise duties and other taxes on consumption. The Irish tax system is primarily in place to pay for current expenditure programs, such universal free education (including third level), free healthcare, old age pensions and unemployment benefit, and public capital expenditure, such as the National Development Plan.
from: http://en.wikipedia.org/wiki/Taxation_in_the_Republic_of_Ireland
Also, the notion that a reduced corporate tax rate will benefit America seems to require that the 10% increase be recirculated back into the US economy. If less than 50% is recirculated, is it still helpful?
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ReplyDeleteGood point. No one should be talking about adding spending at this point. I certainly know when my personal budget is running in the red, spending is the last thing on my mind.
However, if cutting taxes could increase the government's revenue due to expanding the taxable base (i.e. enlarging the economy), then it might be a good idea.
Scott -
You're absolutely correct. If we were comparing the total tax revenue for the government it would be simplistic to just look at corporate tax rates and draw comparisons that way. However, for this exercise I'm only refering to the revenue 'earned' off only the corporate tax, as part of each countries GDP. That way, we're comparing apples to apples. I agree, the government can get revenue on other forms of taxation, but a good measure for corporate strength would be revenue earned off only the corporate tax. Each country taxes on different things, but as long as we're looking at only one form of taxation, and extrapolating that earned revenue as a % of GDP we should be ok, it is a good comparison.
A lower tax is good for the economy, and country at large, not because by itself it circulates money into the U.S. economy, but because low taxes stimulate growth and competition. If I could move my business overseas, and pay 20% less taxes, I'd do it. Wouldn't you?
-Daniel
I generally agree with lower taxes, for everyone. However it really irks me that both candidates are running their campaigns on tax cuts right now. I know that their promises will not be kept. But their campaigns frame the debate on what is responsible fiscal and tax policy in this country. I would appreciate either candidate standing up and saying, "look, we are in a real bad situation here and we can't fix it easily. Taxes will stay where they are for awhile, and everyone is going to suffer. But to get this thing fixed, we need to be honest about what this is going to cost us."
ReplyDeleteIf either candidate said that, I might change my vote.
Low taxes are good in an economy that relies little on the government. However when laws governing corporate entities are so lax that anything goes, much of that taxable revenue never makes it into the coffers of the government. Its too complicated to just say lets lower the tax to 10% and we'll be rolling in the dough. The complexities of the trickle down theory have been its undoing since Reagan. In a perfect world, the Invisible hand would take care of everyone. But that's just not the way things really work.
Ireland is not a fair comparision, because they don't have the same issues that the US does. They have a significantly smaller population, economy, infrastructure. And they also are part of the E.U. which is basically the most effeicient and open free markets in the world which consequently helps spread the burden of economic issues around to many countries. I wish the US could be part of the EU. Instead we are stuck with NAFTA and trading volkswagens for guns with Mexico (that is wayyyyy oversimplified but you get the point). the same is true for another country in Europe, Denmark. I was recently talking with some Danes who were telling me how socialism works in their country. It sounds magical, free healthcare, education, retirement, yadda yadda. They are totally happy with paying more than %50 of their check to taxes and paying ridiculous taxes on things like cars (no joke, %130 tax on a new car). But that system wouldn't work in the US for many reasons, one of which would be the size of our population. So a system like the one in Ireland might be nice for them, but that doesn't mean it would work here.
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ReplyDeleteI'm not comparing Ireland and the U.S. in a general sense, only very specifically. I'm not trying to discuss how their entire economy functions, only the revenue brought in by one tax: the corporate tax. It isn't trickle down economics per se. It's more the idea that when unburdened by government, business (small and large) thrives. Give them more money, they invest it in their business.
Comparing the entire economies of the two nations would be much more difficult, I agree. I don't want to do that here, I only wanted to discuss the corporate tax rate. For that purpose, I still believe the comparison is valid. The broader implications of socialism would be better reserved for a different post.
-Daniel