04 Jan Should the U.S. raise or lower the tax rate for corporations?
In the United States of America, corporations pay taxes on different levels such as federal, state, and local. Since the ‘Tax Cuts & Jobs Act of 2017’ has passed on January 1, 2018, Americans are paying nominal federal corporate tax at the rate of 21%. This bill has benefited all Americans, as they were paying taxes on the rate of 35%, earlier. But corporations have received the most benefit. Lower taxes will bring in more investments in the United States and lower down the profit shifting.
Tax plays a very pivotal role in deciding where the new capital will be invested. Among all the taxes, corporate income tax impacts the economic growth mostly. Money is highly mobile, which makes it quite sensitive to taxation. After all, it is easy for a corporation to shift its operation in a low-tax area, but very difficult for an individual to move entire family for just saving taxes. Hence, the lower corporate tax rate will reduce the economic damage. If the tax rate increases, capital will move in response and immobile workers will suffer. Empirical studies have shown that the workers must bear 50 to 100 percent of the corporate tax burden. However, in the long run, it is balanced evenly.
After the last recession, jobs are regularly being added; the unemployment rate is 3.7 percent. Wages are increasing at the rate of 3.1% every year, but inflation is wiping-off the wage growth. As of now, it is too early for the corporates to transfer the benefits of the new tax bill to the workers. Gradually, it might start benefiting them. However, benefits to the individuals might come in a way that they get more money back from the IRS. Overall, it is too soon to know what will happen. Many other factors affect the overall situation; that’s why the same business owners who are happy with a tax cut are not very upright with Trump’s trade war.
Tax cuts have boosted economic growth, but there are other factors to be considered such as GDP. In the second quarter of 2018, gross domestic product growth was 4.2%. The third quarter of the year noted the growth at 3.5%. As per the estimations, it will be overall 3.1% for the year 2018. Government spending is increasing, and business investments, as well as government purchases, are seeming to slow down in the coming future. So, for 2019, the GDP might go down to 2.4%. Further, it is projected that it will decline more to 1.6% from 2020 to 2022; and will keep falling annually to 1.7% from 2023 to 2028.
Now, when the corporate tax has been significantly reduced, worker-wages were expected to rise. However, it didn’t really happen that way. Very few corporates have increased the wages of workers.
On the other hand, as corporations will have more money, they will invest more in resources. This will grow employment. If things grew ideally and corporations rightly increased the wages, the economy will increase by 1.7%, wages by 1.5%, and capital stock by 4.8%. Higher corporate tax puts most burden on the workers. Lower tax can make their lives better, only if corporates choose to do so.
So, now we know what should ideally happen if the corporate tax increases. It will lower down the economic growth, wages, capital stock, and employment. However, it is also an assumption of an ideal condition. If we consider the UK as an example, the wages had reduced with the reduced tax, which is entirely opposite of the expected result. Overall, we don’t really know what will happen until actual results come in the longer run.
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