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Are Corporate Tax Rates Stymying American Innovation
- 1. Are Corporate Tax Rates Stymying American Innovation? Presented by: Paul Connet, Honors College
- 2. What Are Corporate Taxes And Do They Really Matter? >> A Corporate Tax is a fee levied on a corporation based upon the profit they generate. >> Corporate Taxes affect many different sectors of our economy.
- 3. The Current Situation: >> Corporate Taxes are adding onto our current fiscal problems. >> The United States now has the highest Corporate Tax Rate in the world.
- 4. Where Do We Stand Globally? Global Corporate Tax Rates
- 5. Connection Between Corporate Taxes, U.S. Innovation and Competitiveness Increased Corporate Tax Increased Increased Increased Corporate Cut Revenue Innovation Competitiveness Investment
- 6. November 2011 – Information Technology and Innovation Foundation
- 7. Is the U.S. Corporate Tax Rate Competitive? >> The United States hasn’t always had the highest corporate tax rate. In fact, the United States used to have one of the lowest corporate tax rates >> Innovation tends to take place where investment climate is best. The interplay between innovation and capital accumulation makes failure to reform the U.S. corporate tax system more damaging to the economy. >> As the U.S. corporate tax stays high the U.S. continues to fall behind in innovation and productive capacity.
- 8. A Solution on the Horizon? >> It seems relatively easy. If we want our economy to rebound, we want new jobs to be created in and remain in America. >> There is a consensus building that if we want to continue to be the World’s leader in innovation, then we need to lower our corporate tax rates.
- 9. Opposition to the ‘Silver Bullet’ >> Tax cuts take away from government spending. >> Giving corporations tax breaks doesn’t always lead to an increase in investments but instead leads to higher profits distributed to CEOs and stockholders.
- 10. A Probable Scenario American’s want accountability and as such, Corporate Tax Credits are a more probable solution than new tax cuts or reform.
- 11. What’s Likely to Happen? >> Tax Credits or a lowering in the corporate tax rate will not increase corporate investment in R&D drastically in the near term. >> In the long run, corporate tax cuts will increase investment in innovation, though the real effect will be less than promoted. >> Ultimately, similar to many political questions today, the solution on how to increase American Competitiveness and Innovation can be answered by ‘It’s the economy, stupid’.
- 12. A Similar Jump Start Increased Increased Lower Interest Corporate Tax Incentive to Increased Increased Increased Corporate Rates Cut borrow money Revenue Innovation Competitiveness Investment to invest
- 13. Corporate Focus is Inescapable >> Whenever we give corporations more revenues, profits go to a select few. >> Given the current state of the Economy, corporations are more likely to distribute dividends to shareholders rather than make new investments.
- 14. Long Term Solution >> Serious tax credits or an overhaul of the corporate tax policy aimed at spurring American innovation and economic growth will have an effect over the long term. >> There is no reason to doubt that Corporations will spend more time investing in American businesses if it becomes more profitable for them.
- 15. Will Additional Tax Credits Work? >> Tax credits will help – either now or in the future. >> It’s better to have a system in place now, than wait. >> Every bit helps fuel innovation, and ultimately, our lagging economy.
- 16. 4. Garofalo, Pat. "FLASHBACK: Corporations Used 1. Tax Foundation. "Corporate Income Taxes 2004 Tax Holiday To Repatriate Billions, Then Laid Homepage." Tax Foundation. The Tax Foundation, Off Thousands Of Workers." Think Progress 2012. Web. 4 Apr. 2012. Economy. Think Progress, 05/4/2011. Web. 4 Apr. <http://taxfoundation.org/research/topic/91.html>. 2012. 2. Kamarck, Elaine. "Lower Corporate TAxes, Increase <http://thinkprogress.org/economy/2011/05/14/17 Competition." Editorial. Huffington Post Business 3951/repatriation-flashback/?mobile=nc>. Section. Huffington Post, 12/09/2011. Web. 4 Apr. 5. Tax Foundation. "Graph: U.S. Business Tax Rates Fall 2012. <http://www.huffingtonpost.com/ elaine- Behind By Standing Still (Corporate Tax Rates in U.S. kamarck/corporate-tax-rate_b_1139404.html>. vs. OECD Average, 1981-2010)." Tax Foundation. Tax 3. Tax Foundation. "U.S. Corporate Tax System: Falling Foundation, 01/25/2011. Web. 4 Apr. 2012. Behind by Standing Still ." Tax Foundation. The Tax <http://www.taxfoundation.org/taxdata/show/2334 Foundation, 12/05/011. Web. 4 Apr. 2012. 2.html>. Notes for copying and pasting: <http://www.taxfoundation.org/news/show/ 6. Information Technology and Innovation Foundation . 27814.html>. “Graph: U.S. Innovation Ranking” <http://www.itif.org/events/us-competitiveness- new-conversation-new-opportunities> For More Information: Paul Connet Download Presentation at: connetpb@vcu.edu http://tinyurl.com/cyxcys4
Editor's Notes
- A Corporate Tax is a fee levied on a corporation based upon the profit they generate.The federal corporate income tax was first instituted in 1909 when income above $5,000 was subjected to a one percent tax rate.1Corporate Taxes are felt throughout our economy, often times characterized as having a multiplier effect. One such example of the effect of Corporate tax rates is the link between corporate tax rates and reduced wages especially amongst lower waged workers (Wage data from 65 countries over 25 years shows that every one percent increase in corporate tax rates leads to a 0.5 to 0.6 percent decrease in wages).2
- United States companies and hardworking Americans face a steadily growing problem, one oddly self-imposed by Uncle Sam. Our current tax system puts businesses and workers at a competitive disadvantage in the global market and discourages companies from investing in operations and innovation here at home.On Sunday, April 1, Japan lowered its corporate tax rate, leaving the United States with the highest effective rate among developed countries: 39.2 percent. - U.S. News and World Report, March 29, 2012
- Here is a chart just to give you a perspective of how the Corporate Tax in the United States compares with other nations.
- When the government reduces the corporate tax rate, firms find themselves with additional revenues. This increased amount of revenues can be used for a whole host items, but typically a large share of the additional revenues goes into investments. This includes capital investments such as factories, machines and offices as well as labor resources such as additional workers and higher wages. Another possible avenue of expenditure includes items such as R&D. Before moving on, we need to address a central question: What is innovation? For the sake of simplicity, we’ll say that innovation is changing an old practice to become more efficient. With that in mind, an increase in skilled labors, utilities and potentially new technologies creates a cauldron where innovative ideas are formed. And typically when one firm can produce a good or service more effectively than their competition, their stock tends to increase. That’s how Corporate Tax Cuts can lead to Increased Competitiveness.
- In 1986, America lowered its corporate tax rate to 35%, approximately a 10% decrease, becoming one of the first nations to do so. The result was new American Growth. Since then, other nations have lowered their tax rates well below the 35% level while the United States has held steady.3As might already know, recently the United States has suffered a weak economy with jobs becoming a scarce commodity. It’s argued that the high corporate tax rate is stymying investment and job growth in the United States since it is now cheaper to conduct business abroad than it is in the United States since Innovation takes place where the Investment climate is best. As we continue to keep our Corporate Tax Rates high, we continue to weaken the capital accumulation of our American Corporations, thus hindering our innovation and productivity capacity.
- It seems very easy. If lower our Corporate Tax rates to a more competitive level, then corporations will have more incentives to invest in America and Americans. Regardless of political affiliation, it is well recognized that something needs to be done to improve American competitiveness. Gradually, corporate tax reform is appearing to be the best first action.
- If it is this easy to improve the economy, then why haven’t we already lowered Corporate taxes?One reason is that Tax cuts takes away from government spending. Government spending has a higher multiplier effect (or how much each part of a dollar gets cycled back through the economy) than tax cuts do economically. Typically government spending projects have a multiplier effects in the upper 1’s and 2’s range, while tax cuts are sub 1 for the most part.Another cause for concern is how corporations actually use the additional revenues. The Congressional Research Services examined the 2004 tax holiday approved by congress and discovered that “little evidence exists that new investment was spurred”. Additionally, corporations that benefitted the most from the tax holiday ended up cutting thousands of jobs. Overall, corporations used 92 percent of the money they brought back under the tax holiday to enrich their executives and buy back their own shares, not to invest in job creation.4
- You might find it hard to believe, but big Corporations are not the most highly trusted institutions right now. I believe they rank just above Congress in fact. With that in mind, don’t expect to see Congress just giving away revenue to corporations. Despite the need to reform tax credits in general, what will likely happen instead of Congress just giving Corporation’s a ‘free pass’, is the addition of new and/or reformed corporate tax credits will provide incentives for corporations to invest in certain explicit areas such as R&D. The regulations may even curtail even more specifics such as what type of R&D must be conducted, such as green innovations.
- Recall from earlier our model for how Corporate rates effectively increase innovation and competitiveness. Well lowering corporate tax rates is a demand shock that should have similar consequences as the Federal Reserve lowering nominal interest rates, or the amount of interest charged when borrowing money. Economics informs us that such a move should increase the amount of loans corporations are willing to take out in order to invest simply because there is more benefit in investing in capital and human resources than it is to leave money in the bank. However, the Federal Reserve has been at or near 0% since the financial crisis of 2008 yet we’ve yet to see corporations shift their major strategies to investing. This begs to question what is different about Corporate Tax Rates? I’ve yet to figure out an answer to that question.
- As mentioned earlier, when Corporations have been given any sort of tax relief, some portion of the tax credit is highly likely to end up in the pockets of stakeholders. With the Economy as weak as it is today, the portion ending up with stakeholders is likely higher than in a typical economic situation.
- The Economy is bound to recover at some point. The real question is how strong will America’s Economy will be at that point. If it appears like America will retain its juggernaut’s status, then tax credits will help encourage businesses to expand their American efforts instead of seeking out new locals with cheaper operating experiences. Also, it doesn’t make sense to count on Corporations not taking advantage of tax credits in the long haul as it helps their profit margins.
- Introducing new Tax Credits are worth the effort today. While Corporate Tax rates are not the main force stifling innovation and competitiveness today, they are one additional factor slowing down the economy’s recovery and innovation growth. Additionally, since the future effects of these Tax Credits are so plausible, it’s better to have them in place for when companies begin to truly expand again rather than waiting for that time to come. Also, we can’t discount the fact that there will be some immediate benefits from tax credits albiet limited. It is hard to refuse any path currently that may help stur American Growth and Innovation.