Corporate Income Tax

1. The Top Marginal Corporate Income Tax Rate in the U.S.

The top marginal federal corporate income tax rate in the United States is a flat 21% as indicated by the U.S. Congress, Joint Committee on Taxation (12). Therefore, the corporate tax liability applied in the country before the tax credit is calculated at 21% of the total taxable income, though there are special applicable rules for some corporate taxpayers like the public utilities. 

• The Top Marginal Corporate Income Tax Rate before TCJA of 2017

Gale, Gelfond, Krupkin, Mazur, and Toder (5) indicates that the TCJA (Tax Cut and Jobs Acts) lowered the top marginal corporate income tax rate to 21% from 35%. This made the US corporate tax rate to fall below the average tax rate level for most of the OECD nations. Since 2018, TCJA also removed the corporate alternative minimum tax and the graduated corporate tax schedule. 

• Democrats’ Argument for Higher Corporate Tax Rate

Ideally, the Democratic Party aims to utilize tax revenues to improve the nation’s economy, the middle class, education, and on the needy. They propose that corporate firms should pay additional taxes on every dollar higher than $100 million reported by corporates in profits as this will escalate to more than $1 trillion in the next 10 years (Deutsche Bank, 6). The Democrats in both houses supports legislations that will cut taxes for the working families and increase the taxation levy for corporates and the wealthy Americans. This is mainly aimed at lowering the loss of revenue experienced by the middle class population.    

• Argument in Favor of A Low Corporate Tax Rate

There is a general argument that low corporate tax rates immensely benefits the whole economy. As illustrated by Hodge and Hickman (2), a low tax rate reduces the pretax return required for an acceptable after-tax return. This makes productivity, economic output, and wages more attractive as they largely depend on an encouraged capital formation. There will be additional capital in the economy when corporate taxes are lowered, providing the necessary capital for the after-tax hurdle rate. This means that the economy will benefit from a productive workforce as well as an increase in wages, thereby, leading to economic growth. Hodge and Hickman (3) explains that governments will be able to escalate new the growth of existing businesses as well as formation of new business. Furthermore, it is a practice that will discourage relocation of local businesses and encourage international corporate investment. 

• The Highest Marginal Individual Income Tax Rate in the U.S.

In the U.S, individual income taxes are levied depending on the person’s taxable income (U.S. Congress, Joint Committee on Taxation, 1). They are basically, based on an individual’s filling status like single and head of household individuals. Higher individual income means higher individual tax rates and vice versa. This is applied in computing the tentative tax liability, after which tax credits tax deductions and tax credits can be utilized to lower or escalate the individual after tax.

• Reasons for the Low Corporate Taxes in Comparison to  Individual Income Taxes

As eurodad.org (3) explains, there are various reasons why corporate taxes are an asset to nations such as the United States, which justifies the reduction in corporate taxes. Among the reasons is that corporate revenue is irreplaceable since they form approximately 10% of a nation’s total taxes. Furthermore, corporate taxes are a backstop for the individual income taxes. They hold the country’s tax system together, ensuring that the wealthy individuals do not use corporate schemes for tax evasion and shelter. Among other reasons is controlling organizations from rent-seeking (the unhelpful wealth mining instead wealth generation) and encouraging financial transparency.

• Present an argument for corporate taxes to be higher or equal to the highest individual income tax rates.

It is deduced that corporate tax is extremely significant for economic growth. This is because capital is a mobile commodity and very sensitive to taxation while labor is immobile. Based on this assumption, it is easy for corporations to locate to accommodative tax economies while it is extremely difficulties to move labor due to tax reasons. As such, capital easily responds to changes in the tax system, thus, raising the corporate tax rate increases the negative economic effects caused by taxation. Among the effects include the reduction in wages and productivity as labor bears the burden of the increased corporate tax and reduced individual tax rates. In summary, therefore, higher corporate taxes leads to higher costs of capital, which in turn reduces capital creation and utilization. Hence, higher corporate taxes compared to individual taxes will lower the capital stock in the long-run, thus, inhibiting corporation and economy growth.  

• Present an argument for corporate taxes to be lower than the average individual income tax rate?

Fuest, Huber, and Nielsen (1) notes that in many nations, the corporate tax rates are lower than the average individual income tax rates. This differentiation in tax rates is an ideal tax policy that allows for equity financing, thereby, moderating the utilization of debt financing that is particularly prompted by the asymmetric information. Despite its advantages to the economy, lower corporate tax rates raises a variety of challenges. First, any deviation between the individual and corporate taxes leads to incentives that shift the total taxable income to the lower from the higher income group. For instance, a lower corporate tax rate will allow the employees the opportunity for stock options rather than salary payments. The move to lower corporate taxes also introduces the incentive for individuals to create companies for purposes of saving. In such cases, individuals will evade taxes by having assets in the less taxed companies.      

Work Cited

Deutsche Bank. 2020: An inflection point in global corporate tax? 2019. www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000502295/2020%3A_An_inflection_point_in_global_corporate_tax%3F.pdf. Accessed 10 Jan. 2020.

Eurodad.org/. Ten Reasons to Defend the Corporation Tax. 2015. eurodad.org/files/pdf/1546362-ten-reasons-to-defend-the-corporate-income-tax-1450105202.pdf. Accessed 10 Jan. 2020.

Fuest, Clemens, et al. Why is the corporate tax rate lower than the personal tax rate? web.econ.ku.dk/epru/files/wp/00-17.pdf. Accessed 10 Jan. 2020.

Gale, William G., et al. EFFECTS OF THE TAX CUTS AND JOBS ACT: A PRELIMINARY ANALYSIS. 2018. www.brookings.edu/wp-content/uploads/2018/06/ES_20180608_tcja_summary_paper_final.pdf. Accessed 10 Jan. 2020.

Hodge, Scott A., and Bryan Hickman. How Lowering Corporate Tax Rates Encourages Economic Growth. Tax Foundation, 2018. files.taxfoundation.org/20190516115624/How-Lowering-Corporate-Tax-Rates-Encourages-Economic-Growth.pdf.

United States. Congress. Joint Committee on Taxation. Overview of the Federal Tax System as in Effect for 2019. 2019. fas.org/sgp/crs/misc/R45145.pdf. Accessed 10 Jan. 2020.