In the recent article Corporate Tax Cut Windfall, in the Opinion Journal section of the Wall Street Journal, it was shown how the US absolutely needs to lower its corporate tax rate. This is, of course, why American needs to vote John McCain as its next president. The articles gives two arguments for why this is true, but both arguments are inherently flawed. The first claim is that the American corporate tax rate is too high compared to foreign countries. The second claim is that we can see this from the results of the 2004 American Job Creation Act (AJCA).
Why both of the claims are wrong and why McCain's strategy to lower corporate taxes is bad below.
The first argument has already been discussed in this diary More McCain Tomfoolery: Corporate Taxes. Essentially the US corporate tax rate has remained steady over the last couple of decades while our other countries has dropped their rate. According to some this has forced corporations to send their money elsewhere in order to not be taxed the exorbitant US amount. However, the effective tax rate is actually much lower that 35%. It is hard to find good information on the effective tax rate, but this article,The Decline of Corporate Income Tax Revenues by the Center on Budget and Policy Priorities claims that the effective tax rate is actually 26.3% for non-financial companies. Moreover, the corporate taxes as share of GDP has dropped dramatically since the 1950's as seen in this chart from the Tax Policy Center.
The more specific claim in the WSJ article is that evidence of the problem of high corporate tax rate can be seen in the response to a provision in the 2004 AJCA. The purpose of this act, at least according to its name, was to create American jobs, but it was essentially a corporate tax break, and did not create jobs. The provision in question created a tax holiday on repatriated money in the US. It lowered the tax rate on repatriated money from 35% to 5.25% for the year 2005 on any repatriated money. The WSJ article claimed that this may be one reason that US business investment rose 9.6% that year. This may be true, I could not find information on that figure. However, the consensus among writers that I did find was that not much of this money went to creating jobs. In fact, some of the corporations that the biggest tax break from that provision actually cut jobs in the US that year.
(Links supporting the creation of no jobs from repatriated money:
http://www.businessweek.com/...
http://dealbook.blogs.nytimes.com/...
http://www.nytimes.com/...
http://www.taxpolicycenter.org/...
http://www.nytimes.com/...
Some background information on repatriating funds that is important to know at this point is that some corporations shift some of their profits to low-tax countries, even if they don't have a significant presence there. In this way they can avoid paying the higher taxes of other countries. However, in order to repatriate the money, they would have to pay US income taxes. Corporations are given a foreign tax credit, so that they don't have to pay double taxes on their money. The credit is equal to the taxes they paid, so it costs more to repatriate money from a low-tax country to than from a high-tax country. Corporations can sometimes use tax credits earned in high-tax countries to bring in money, but the tax holiday essentially made it much cheaper to bring in repatriate money from low-tax countries.
(For more information on this read page 3-4 of this pdf from the Tax Policy Center: American Jobs Creation Act)
Some people claimed (read: no evidence) that companies were saving money in await for such a tax holiday. While this may not have been true before it certainly is now, since:
Senator John Ensign of Nevada, the author of the 2005 holiday bill, is proposing to do the same again for one year to stimulate the economy. As a rule, we don't like temporary tax cuts because they don't provide permanent incentives. But the 2005 holiday was an exception that proved the folly of current policy.
~WSJ Corporate Tax Cut Windfall
So here's the point, yes repatriated money increased in 2005 because of the AJCA, however, that does not indicate that our tax rate is too high. Merely it indicates that corporation took advantage of this tax holiday.
Along with this bad analysis, the WSJ opinion piece concludes by saying that John McCain is the better candidate for president.
The best response going forward would be for Congress and the next Administration to reduce sharply the corporate tax rate so it is competitive with falling rates around the world. John McCain is proposing to cut it to 25%. If Barack Obama really wanted to "run to the center," he'd see that and cut it even further. As the 2005 results show, he'd then have more tax revenue to spend on his many social programs.
~WSJ Corporate Tax Cut Windfall
Of course, as discussed in Obamanomics in the WSJ: a corporate tax cut?, Barack Obama's real policy is that he wants to clean up the corporate tax code before he considers lowering the rate. John McCain's, on the other hand, is to simply lower the rate to 25%, without addressing the fact that the effective rate is already around 25%.
Disclaimer: I don't really know anything about corporate taxes, this is the result of research I did yesterday on the topic. If you know more than I do, feel free to correct me in the comments.