CBPP Calls for a Lower Corporate Income Tax Rate to Increase Employment

Decrying its effects on the U.S. manufacturing industry, Susan Houseman writing for the Center on Budget and Policy Priorities’ “Full Employment” initiative has called for a reduction in the United States’ high corporate income tax rate:

“High U.S. statutory corporate income tax rates, which in the top bracket are 39 percent when federal and state taxes are combined, also have dampened job growth in the United States. While the income tax rates companies actually pay can be considerably lower, among manufacturing firms in recent years the average effective tax rate for those headquartered in the United States was 26 percent, one of the highest in the world and 11 percentage points higher than the average effective rate for manufacturers headquartered in tax havens. In response to such differences, some American companies have moved their corporate headquarters overseas. Moreover, relatively high marginal U.S. corporate tax rates give multinational companies a strong incentive to hold or reinvest their foreign earnings overseas. Significantly lowering corporate income taxes in a revenue-neutral way by eliminating deductions and simplifying the tax code enjoys broad bipartisan support. While such reform is not specific to manufacturing, it is important to revitalizing the sector.”

We agree: the rate should be lower. The 39.1 percent combined corporate income tax rate puts U.S. corporations (manufacturers or not) at a competitive disadvantage. Corporations headquartered in the 33 other industrialized countries face an average rate of 25 percent. Lowering the U.S. corporate income tax rate would improve the competitiveness of all U.S. corporations, reduce the cost of capital, and lead to higher level of employment, as CBPP argues.

All that being said, we should be careful about “revenue neutral” corporate tax reform. Even if we lower the corporate rate and pay for it by eliminating deductions we may end up hurting the economy. This is especially true for manufacturers if the government lengthens asset lives, as some recent tax reform plans have suggested. Manufacturing is a capital intensive industry and lengthening assets lives and moving farther from full expensing will harm their competitiveness even with a lower corporate tax rate.