Why Corporate Tax Rates Matter

by | US Economic News

Corporate tax rates impact every company – but not equally.

Both political parties are calling for lower tax rates on corporate earnings, and it’s no wonder: At 35%, the United States has, since April 1, 2012, had the highest corporate tax rate in the world. In addition, state-imposed taxes on earnings bring, on average, the total tax burden to just over 39%.

The average tax rate in other developed countries is about 25%.

Does it matter? Sure. Companies in the U.S. are at disadvantage when competing against foreign-based companies that pay taxes at lower rates. This potentially prevents U.S. firms from keeping up in terms of innovations and production capabilities, and negatively impacts economic growth, employment, and return on investment.

Plus, some countries have left the U.S., in part because of tax reasons (Anheuser-Busch), and it’s probable that many companies have elected to not locate in the States because of the tax consequences.

Who really pays?

On the other hand, it’s important to remember that no major company actually pays the nominal tax rate. It’s like walking into a car dealership and not paying the sticker price. Big companies have access to credits, shelters, deductions, and incentives that reduce their rate to an average of 13 percent, according to U.S. News. In fact, a few very profitable companies pay no federal income tax at all.

The real problem could be that smaller companies, which provide the majority of new jobs in the U.S. economy, pay taxes at a higher rate, since they tend to not have the ability to take advantage of the incentives enjoyed by bigger firms.

This is counter-productive, mostly because the higher rates drain cash from growth-stage companies that could invest in additional personnel, equipment, and other tools for expansion.

It’s worth mentioning, too, that according to the National Federation of Independent Businesses, 75% of small companies – which are organized as partnerships, sole proprietors, S corps, and limited liability companies – have their business earnings flow through to owners’ personal income and are taxed at individual income tax rates.

Having the Bush-era tax cuts expire at year-end would force non-corporate business owners facing a federal income tax rate of over 40 percent next year on earnings over $250,000.

It stands to reason that if the previous, higher tax rates are allowed to return, the small business community would experience a serious tax hit, and this would shrink the amount of capital available for growth, innovation and expansion.


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