Most companies do not pay the full corporate tax. The current US corporate tax rate is 35 percent; however, due to creative accounting and tax loopholes, large corporations can avoid paying the full amount. In fact, the effective corporate tax rate that corporations pay is just 12.1 percent. Many of our biggest companies paid nothing in corporate taxes. For example, by the end of 2010, GE recorded profits of $81 billion yet only paid 2.3 percent in corporate income taxes. In 2012, Citizens for Tax Justice published a study of taxes paid by the 280 most profitable U.S. corporations. It found that 40 percent of them paid an effective rate of 17.5 percent or less over the last three years, with 30 companies paying nothing and 67 companies paying less than 10 percent. With these companies paying far less than the actual tax, the government is not receiving money it could potentially invest in public services. This loss of tax revenue could lead to an increase in individual income and payroll taxes.
In reality we are not taxing more than foreign nations. Corporations complain that they pay higher taxes here than in foreign countries and that U.S. laws discourage them from repatriating foreign earnings. While it is true that the statutory corporate tax rate in the U.S. is relatively high compared to other countries, it’s not clear that this is a meaningful measure of the tax burden on corporate businesses. In order to calculate the total federal tax rate on income earned in the corporate sector, one needs to follow the trail to the owners of a corporation, namely, its shareholders. Since they also pay taxes on the same income that is taxed at the corporate level, corporate profits are double taxed in most foreign countries. Additionally, if we were to lower our tax rate, a CRS (Congressional Research Service) study showed that other large economies, such as China and India, would only respond with a retaliatory reduction of their own tax rate, leading to a race to the bottom.
Research shows that taxes don't have as much of an impact on where corporations invest. One common argument for cutting corporate taxes is that high tax rates cause companies, both US and foreign, to invest elsewhere. However, 2010 study conducted by Steve Fazzari of Washington University looked at thousands of companies and found that taxes really don’t have that much impact on corporate investment decisions. What matters most to companies is the cost of capital, which dictates how large a return companies will make when they, for example, open a new plant. Taxes make up a very small portion of that calculation. Rather, firms assess the political stability, infrastructure, and labor force of a nation when they are deciding where to locate.
Cutting the corporate tax rate will promote higher long-term economic growth. An important 2008 report by economists at the Organization for Economic Cooperation and Development (OECD) measured the relationship between different types of taxes and economic development. The evidence showed that the corporate income tax is the most harmful tax for long-term economic growth because corporate money in excessively large quantities. The report found that corporate income taxes appear to have a particularly negative impact on GDP per capita. When statutory corporate tax rates are lowered, firms that are dynamic and profitable (i.e., those that can make the largest contribution to GDP) experience gains in productivity. OECD economists speculate that this could be because these firms rely heavily on retained earnings to finance their growth. Higher taxes mean less retained earnings, which prevents them from investing in beneficial things such as: research and development. Many noted economists have predicted that the U.S economy will be between 1.5 to 2.6 percent smaller over the long-term because other nations’ corporate tax rates are considerably more competitive.
Cutting the corporate tax rate will improve U.S. competitiveness. At 35 percent, the overall U.S. corporate tax rate is one of the highest in the world. It is 10 percentage points higher than the OECD average of 25 percent even after incorporating various deductions, credits, and other tax reducing provisions. Over the past four years, 75 countries have cut their corporate tax rates to attract investments. Britain has set out a detailed plan to create the most competitive corporate taxation system in the G20, aiming to lower corporate taxes from 28 percent to 17 percent by 2020. This plan is motivated by the departure of large British multinationals such as the advertising giant WPP and the drug maker Shire who have moved to Ireland in the last three years. The high “sticker price” of the U.S. corporate tax rate not only makes the American economy less competitive globally; it makes American businesses more eager to outsource and less eager to keep jobs in America.