While the Democrats and their friends in the media will say the cuts in corporate taxes are a giveaway to big business, this is a transparently disingenuous critique. We know that because Democrats, when in charge, proposed their own massive cuts to the corporate tax rate, which gives away the game.
Why would Democrats want simplification and rate reduction in corporate taxes when they are in charge, but oppose it when Republicans are in charge? Because they know it will work.
President Barack Obama in 2012 rightly lamented that, “our current corporate tax system is outdated, unfair, and inefficient.” He cursed that the U.S. has “one of the highest tax rates in the world,” and said the tax code facing corporations is “unnecessarily complicated and forces America’s small businesses to spend countless hours and dollars filing their taxes.”
Obama proposed to cut the corporate tax rate and simplify the code not as a thank-you to corporate America, but because he knew it would juice the economy. And if we had to guess, that is exactly why Democrats oppose a rate cut and simplification today.
The U.S. currently has the highest corporate tax rate of any advanced economy, 35 percent. Very few companies pay anywhere near 35 percent of their earnings in taxes, however, because our complex tax code has so many dodges, shelters, and deferrals. This fact doesn’t acquit the corporate code. It indicts it all the more.
A high rate and a complex code are the worst formula. Many U.S. businesses really do pay 35 percent on their marginal dollar of profit, and that creates a great disincentive to expanding—or expanding in the U.S., at least.
Lowering the top rate will fix that, and will inspire many businesses to invest, expand, or even move here from elsewhere.
Simplifying the code will make the economy more efficient in a few ways. First, it will reduce compliance costs (sorry, accountants!), thus reducing dead-weight loss. More importantly, a simpler code will have distortions. Companies big enough to hire expensive tax lawyers and lobbyists and flexible enough to game the tax code do exactly that. That means they’re not investing according to what’s most economical or where there’s the most demand. Instead they are following the tax code.
A less distorted economy will be a bigger economy.
And there’s the rub.
No matter how boorish or off-putting President Trump may be, no matter how unprepared or disorganized his administration looks, and no matter how much a stench of bigotry may stick to his White House, he will get re-elected if the economy continues to boom. And it’s already booming: The unemployment rate hit a 17-year low of 4.1 percent last month, the Dow keeps shattering records, and the economy is growing at a 3 percent clip.
If this keeps up for another year, or even accelerates, then Republicans have a good chance of keeping the House and the Senate.
The Democratic Party, already in shambles after Obama and Hillary Clinton, cannot afford that sort of prosperity.