In a recent announcement, the White House announced its plan to make good on one of Trump’s campaign promises — lowering the corporate tax rate. The question remains if Trump has the political acumen to get this proposal passed. It will likely be many months before the House and Senate are able to actually agree on and pass a bill, but the proposal in and of itself has dangerous implications for our country.
In a move to be more competitive on the international stage, Trump has proposed tax cuts to businesses from 35 percent to 15 percent since the US has a comparatively high corporate tax rate.
Backed by economist Larry Kudlow, the plan’s focus is on invigorating businesses and drawing companies from overseas with a competitive tax rate. This would encourage companies to base themselves in the United States as opposed to another nation with lower taxes.
This worked well for Ireland given the decision for Apple to base its business there, which slashed the tax rate on Apple drastically and providing Ireland with additional tax revenue.
As conservative economists point out, the U.S.’s tax rate is one of the highest in the world, which leaves us at a comparative disadvantage for attracting companies.
While this sort of corporate tax cutting was helpful for Ireland, for the U.S., particularly with the proposal Trump is extending, it’s not a smart move. Firstly, though it could stimulate the economy with international businesses, it dramatically cuts corporate tax income which could contribute $2.4 trillion to the deficit in the next decade.
Further, with interest rates near zero, the U.S. is bound for an interest rate hike, which would damage the economy. While this is usually a problem under normal circumstances, it would be doubly so if government revenue is critically dependent on new businesses.
Even if the U.S. were to implement a 15 percent tax rate, Ireland and the Cayman Islands would still have lower tax rates, so there would still be incentive to base companies there.
Essentially, if companies want to avoid taxes that badly, there’s no way we’re going to stop them. At the same time, there’s an immense level of inconvenience involved in moving a company overseas.
What the U.S. needs to do is lower its tax rate to be competitive but not to be a world leader. The standard rate varies between 20 and 30 percent, and this is the competitive mark that the United States needs to match.
This will encourage American companies to stay in the U.S. while at the same time keeping the tax rate at a reasonable level. If it is cut too low, government revenue will suffer and the deficit will ballon. The key is, as always, moderation.
ctdombro@umail.iu.edu
@doctorthaddeus
