Why Lower Corporate Taxes Won’t Jolt the Job Market
Policy + Politics

Why Lower Corporate Taxes Won’t Jolt the Job Market

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To the delight of the business community, all of the GOP presidential contenders have called for lower corporate taxes, decrying the 35 percent top rate as a hindrance to investment, hiring, and economic growth.  Herman Cain, who has been surging in the polls, would  throw out the current tax code and lower the corporate rate to 9 percent as part of his his much-talked-about  9-9-9 plan.  

“Continuing to pivot off the current tax code is not going to boost this economy,” Cain said in a Republican presidential debate last week on Bloomberg TV.  “My top priority is 9-9-9.  Jobs, jobs, jobs!”

However, some economists argue that cutting the corporate rate -- or addressing tax reform at all-- isn’t a viable solution to lowering the 9.1 percent unemployment rate, creating jobs, or preventing a second recession, even if it could get the economy humming in the future.   

“There’s a lot of exaggeration [about] what the economy might gain from tax reform,” said Congressional Research Service economist Jane Gravelle at a Brookings Institution panel discussion Wednesday. According to her calculations from earlier this year, cutting the top corporate rate from 35 percent to 25 percent as congressmen such as House Budget Chairman Paul Ryan, R-Wis., and House Ways and Means Chairman Dave Camp, R-Mich., have suggested would increase U.S. output by two-tenths of one percentage point of GDP and U.S. income by two-one-hundredths of a percent of GDP.  Moreover, it would be a major challenge to even get the rate down to 25 percent, she said.  According to her numbers, repealing every corporate tax expenditure in the code would only offset the cost of lowering the corporate rate to just below 30 percent. “There’s not very much room for a deep cut in the corporate rate without losing revenue,” Gravelle said.

Eric Toder, co-director of the Urban-Brookings Tax Policy Center, and Bruce Bartlett, a former economic adviser to Ronald Reagan and now a columnist for The Fiscal Times, agreed with Gravelle during the panel discussion. “The nature of our economy’s problems is not really amenable to tax solutions at this particular moment in time,” said Bartlett.

But while slashing the corporate rate isn’t a short-term economic solution, in the long term getting the rate down is vital to laying the foundation for economic growth, Mark Zandi, chief economist at Moody’s Analytics, told The Fiscal Times. “Tax reform isn’t the magic bullet—I don’t think lowering the rate or reforming the system by itself solves our long-term economic problems. But in the long run, tax reform could have a significant impact on jobs,” particularly by encouraging U.S. export growth, he said. “…One of the reasons the economy is not engaging is that businesses are very nervous and cautious, and [tax reform] could have much greater economic benefits by addressing some of the very serious concerns business people have.”

Insiders in the corporate world and lower-tax advocates also concede that reform will be a slow crawl but say the long-term economic payoff, however elusive, should not be discounted. “If you could push a button and enact tax reform today, it wouldn’t start to affect the economy for a while.  But there is no button to push,” said Ken Kies, a corporate tax lobbyist. “Tax reform takes a long time, and it’s not very far along at this point.”

But longer term, axing tax preferences for corporations and cutting rates would both encourage more capital to remain in the U.S. and improve tax compliance, Kies said. The current system encourages multinationals to shift as much of their income overseas and foreign investors to strip as much of their U.S. investments away by deducting the maximum amount of interest,  he said.  “If you lower the corporate tax rate, you’ll materially reduce the incentive for both of those actions, which will improve compliance, mean better collections, and mean less earnings stripping,” Kies added. “That would mean the potential for economic growth would be enhanced, though I can’t tell you by how much.”