Back to Top

SUPPORT FOR CORPORATE TAX INCREASE

The first federal income tax was levied by Congress from 1862-1872 to pay for the Civil War but was replaced by a tariff (a tax on imported goods that raises prices for consumers to advantage domestic producers). The federal income tax (a 2% flat tax on incomes above $4,000, including corporate income) was revived by Congress in the Income Tax Act of 1894, which the Supreme Court declared unconstitutional in 1895 in Pollack v. Farmers’ Loan & Trust. In a 5-4 decision, the justices ruled that federal taxes on personal income are “direct taxes,” a class of taxes that Article I, Section 2, Clause 3 of the Constitution requires be “equally apportioned among the states according to population.” According to the Wall Street Journal, imposing personal income taxes equally among states is “obviously impossible,” because state populations vary widely and fluctuate from year to year.
Since corporate income taxes were considered “excise” taxes (taxes on the sale, or production for sale, of specific goods), the Supreme Court’s ruling did not apply to them. In a June 16, 1909 address to Congress, President William Howard Taft proposed simultaneous actions: a constitutional amendment allowing the federal government to levy a personal income tax and a separate federal tax on corporate income. The Corporation Excise Tax Act of 1909 imposed a 1% tax on corporate income above $5,000. On Feb. 3, 1913, Congress passed the 16th Amendment, giving Congress the “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States…”
From 1909 - the first year the federal government levied a separate corporate income tax - to 1935, corporations paid a fixed percentage of their income in taxes regardless of how much they made (although taxes were usually exempted for the first several thousand dollars). From 1936 to today, the number of federal corporate income tax brackets has increased from two to eight. Corporations today pay a 15% tax rate on the first $50,000 in income, up to 35% on all income above $18.33 million. The corporate income tax reached its peak in 1968-1969, when all income over $25,000 was taxed at a rate of 52.8%. 
Corporate income taxes rose from 12.3% of total government revenue in 1934 (the first year data are available) to a peak of 39.8% in 1943, before steadily declining through 1986 to 8.2%. Corporate income tax receipts rose to 14.7% of revenue in 2006 before declining to 8.3% in 2011. As a percentage of US Gross Domestic Product (GDP), corporate income taxes rose from 0.6% in 1934 to a peak of 7.2% in 1945, before declining to 1.2% in 2011.
The US unemployment rate for persons 16 years of age and older rose from 3.9% in 1947 (the first year data are available) to 6.8% in 1958. The rate steadily declined to 3.5% in 1969, but then rose to a historical peak of 9.7% in 1982. The unemployment rate declined again to 4% in 2000, and it increased again to the Oct. 2012 rate of 7.5%.
The United States, as of Dec. 13, 2012, has the highest top federal corporate income tax rate in the OECD at 35%, with Belgium (34%), France (34.4%), Australia (30%), Japan (30%), Mexico (30%), Spain (30%), New Zealand (28%), Norway (28%), and Italy (27.5%) rounding out the top ten. Even after accounting for additional state-level corporate income tax rates, the United States remains on top (39.1%). Since 1997, 30 of the Organization of Economic Cooperation and Development (OECD) member counties have lowered their statutory (written) corporate income tax rates, creating an average tax burden of 25.1%.
Businesses, however, rarely ever pay the statutory corporate income tax rate, due to a wide variety of tax exemptions, preferences, and deductions. The “effective tax rate” is defined as the “ratio of tax paid to pre-tax profits for a given period,” according to the Tax Foundation. Effective tax rates, therefore, measure “the real tax cost of investment and reflect the corporate tax burden.” In 2011, the effective corporate tax rate in the United States was 29.2% (including state and local taxes), roughly in line with the 31.9% average of the six other largest developed economies (Canada, France, Germany, Italy, Japan, and the UK), and fourth highest among the 34 OECD countries. Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a total corporate tax rate – federal and state combined – of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%.
From 1909 through 1945, Congress consistently raised the corporate income tax, and despite a brief decrease from 1945-1952 to encourage business growth following World War II, continued to raise it through 1978. In 1942, in the midst of World War II, US President Franklin Roosevelt said “when so many Americans are contributing all their energies and even their lives to the nation’s great task, I am confident that all Americans will be proud to contribute their utmost in taxes.” From 1940 to 1942 alone, Congress passed four separate Revenue Acts which raised top marginal corporate income tax rates from 19% to 40%.
President Lyndon Johnson, citing the need to approve “a sensible course of fiscal and budgetary policy” and unwilling to gut his comprehensive entitlement programs to pay for the Vietnam War, signed into law the Revenue and Expenditure Control Act of 1968. This act created a temporary 10% income tax surcharge on corporations and increased the top marginal tax rate from 48% to 52.8%. Congressional Chair of the House Ways and Means Committee and fiscal conservative Wilbur Mills (D-AR), an ardent skeptic of corporate tax increases, called the act “fiscal activism” and agreed to its passage only after a concurrent 10% cut in federal discretionary spending.
The 1980s saw four major changes to federal corporate income taxes. The most consequential change, the Tax Reform Act of 1986, reduced the number of corporate income tax brackets from seven to five and slashed rates for all businesses while eliminating $30 billion annually in corporate tax loopholes. Bill Bradley, a Democratic Senator from New Jersey who worked to pass the legislation, said that “the trade-off between loophole elimination and a lower top rate became obvious (the lower the rate, the more loopholes had to be closed to pay for it)… The bipartisan coalition produced a bill that... led to more… economic competitiveness.” Former Republican Senator Alan Simpson, in a statement blasting the act, stated that “the tax reform of 1986 [closed] loopholes that resulted in the largest corporate tax hike in history… Reagan raised taxes 11 times in eight years!” From Oct. 1986, when the Tax Reform Act of 1986 lowered the top marginal corporate income tax rate from 46% to 34%, to Aug. 1993, when rates were increased on businesses earning over $10 million, the federal unemployment rate remained at 6.6%.
On Aug. 10, 1993, President Bill Clinton signed into law the Omnibus Budget Reconciliation Act, which created four new corporate tax brackets with increased rates for businesses with incomes over $335,000. Vice President Al Gore, in a statement hailing the bill’s passage, said “[This bill] means jobs, growth, tax fairness… It’s a message of hope to the small business owner and 96% of all small businesses who will get a tax cut under this plan.” The bill was attacked by United States Chamber of Commerce president Richard Lesher, who said that the corporate tax increases would “slow economic growth and fuel inflation...” and that “foreign competitors would gain an economic advantage over American goods here and abroad.” A group of 300 major corporations and trade associations known as the Tax Reform Action Coalition said it “strongly opposed Mr. Clinton’s move to increase the top rates for… corporate taxes.” From the passage of the bill until the end of Clinton’s term, the US economy gained more than 21.4 million jobs, the unemployment rate fell from 6.8% to 3.9%, industrial production rose by 5.6% per year, and the Dow Jones Industrial average rose 26.7% per year. The tax brackets and rates created by the bill remain in place today.
The corporate tax rate became a topic of discussion in the lead-up to the 2012 presidential election, as President Barack Obama and Republican candidate Mitt Romney outlined their preferred policies. According to the Feb. 2012 “President’s Framework for Business Tax Reform,” released jointly by the White House and the Department of Treasury, the United States should “[reduce] the top corporate tax rate from 35% to 28%... and [eliminate] dozens of business tax loopholes and tax expenditures…” Romney’s budget plan called for reducing the top corporate tax rate to 25% to “jumpstart the economy.”
In Apr. 2016 the Obama administration announced a move to discourage so called “corporate inversions,” where a US-based company merges with a foreign company in order to pay the lower corporate tax rates in that foreign country. In an update to the “President’s Framework for Business Tax Reform,” the White House and the Department of the Treasury proposed a 19% minimum tax on foreign earnings to remove the incentive for companies to relocate abroad. They also repeated their desire to reduce the corporate tax rate from 35% to 28% and put “the United States in line with major competitor countries and encouraging greater investment in America.”
 
The federal corporate income tax rates were the highest in US history when the unemployment rates were the lowest in US history. 
 
From 1951, when the top marginal corporate income tax rate rose from 42% to 50.75%, to 1969, when rates peaked at 52.8%, the unemployment rate moved from 3.3% to 3.5%. From 1986 to 2011, when the top marginal corporate income tax rate declined from 46% to 35%, the unemployment rate increased from 7% to 8.9% 
 
A “tax holiday” in 2004, which temporarily lowered the corporate income tax rate for companies that brought back cash stored overseas, resulted in companies cutting jobs. 
 
In 2004, Congress passed a repatriation tax holiday that allowed companies to bring back profits earned abroad at a 5% income tax rate instead of the top 35% rate. Fifteen of the companies that benefited the most from the tax holiday subsequently cut more than 20,000 net jobs. 
 
Companies hire employees because they need workers, not because of corporate income tax rates. 
 
According to a Nov. 15, 2011 blog post from billionaire Dallas Mavericks owner Mark Cuban, “you hire people because you need them. You don’t hire them because your taxes are lower.” In a July 2011 survey of 53 prominent American economists, 65% said that lack of demand was the main reason why employers were not hiring new employees as compared to 27% who said that uncertainty about corporate taxation was the main reason. 
 
Complaints about high federal corporate income tax rates causing high unemployment are unfounded because loopholes and deductions enable many companies to pay less than the statutory rate. 
 
Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a total corporate tax rate – federal and state combined – of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%. General Electric, a multi-national corporation with net income of $14.16 billion, paid an effective tax rate of 7% in 2010. A 2011 study comparing the effective tax rates of the 100 largest US multinationals to the 100 largest European Union [EU] multinationals during the period of 2001-2010 found that EU multinationals have a higher average effective tax rate despite having to pay a lower statutory rate.
 
Corporate profits in the United States are the highest they have been in 61 years, yet the federal unemployment rate is higher than most of the rest of the developed world. 
 
In 2011, corporate profits made up 10% of US GDP, the highest percentage since 1950. In 2011, the US unemployment rate was 8.9% compared to the OECD (Organisation of Economic Cooperation and Development) average of 8.2%. Despite the highest corporate income tax in the world, corporate income tax revenue only brought the US federal government the equivalent of 1.2% of GDP in 2011 (the lowest percentage in recorded history), compared to the OECD average of 2.9% in 2010. 
 
Lowering the corporate tax rate raises the deficit, which hurts job creation. 
 
Lowering the federal corporate tax rate reduces the amount of money the US government receives in tax revenue, thus reducing federal government programs, investments, and job-creating opportunities. When the Tax Reform Act of 1986 reduced the top marginal rate from 46% to 34%, the federal deficit increased from $149.7 billion to $255 billion from 1987-1993. 
 
Complaints about high federal corporate income tax rates causing high The US economy added 15 million jobs in the five years immediately following a large federal corporate income tax increase in 1993. 
 
The Omnibus Budget Reconciliation Act of 1993 added three new corporate tax brackets and increased the income tax rates for corporations making income over $10 million. The US economy added more than 15 million jobs and grew at an average annual rate of 3.8% in the five years after the legislation was passed. 
 
Unemployment are unfounded because corporations are sitting on record amounts of cash. 
 
As of Oct. 23, 2012, large companies listed in the S&P 500 are holding onto $1.5 trillion in cash (14% of their total value), the highest amount in American history. This cash could, but is not, be used to hire more employees and lower the unemployment rate. President Obama, in a July 22, 2009, press conference, stated “there have been reports just over the last couple of days of... companies making record profits, right now. At a time when everybody’s getting hammered, they’re making record profits.”

 

 


Powered by CampaignPartner.com - Political Websites