In New Report, Ideology trumps Common Sense

A new report from the Center for Effective Government comes with an eye-catching conclusion: if companies pay more taxes, they create more jobs. This assertion runs contrary to just about every economic theory in existence. And it is not just contrary to economic theories; it completely ignores common sense as well.

The report backs up these claims by referencing a claim from the Government Accountability Office that corporations in the United States pay an average effective corporate income tax rate of 12.6 percent. Unfortunately, this GAO claim is now defunct; the revised number that they determined for the actual average effective corporate income tax rate is about 22.9 percent. The new number is almost double the original estimate and there are still some good reasons to believe that even the revised number is too low. Some estimates that take into account foreign taxes on corporate income contend that the average effective corporate income tax rate is about 32 or 33 percent.

The report also relies on data collected from U.S. corporations in a three-year window from 2008 to 2010. While most economists would insist on a window of at least ten years to make any assertions about economic trends, this window is particularly egregious because the report makes no mention of anything else happening in that time period. Namely, the report doesn’t take into account that one of the largest economic recessions in recent history occurred directly in the middle of the time frame they used to come to these conclusions.

Aside from the lack of a reliable time frame and the blatant cherry-picking of data, the report’s findings still border on ridiculous. Let’s consider the basic arguments made in the report:

A)   Thirty profitable corporations that paid little or no U.S. corporate income taxes over this three-year period shed some jobs

B)   If these firms had less money in this time period (by paying more in taxes), they would have saved or created more jobs

C)   Corporate tax deductions and credits should be eliminated and instead taxes should be raised on corporations to create more jobs

This report concludes the best way for companies to expand business and create more jobs is to take away more of their profits. Contrary to this point of view, corporations will be better able to hire more employees when they can actually afford to do so.

There is no doubt that the U.S. corporate income tax needs to be fixed. Taxes should have broad bases and low rates. This means eliminating some credits and deductions that are specific to companies or industries and lowering the rate across the board to create a level playing field for companies to compete. At a time when the United States has the highest corporate income tax in the world, the need to reform this structure to attract new business and help existing business to thrive is clear.

As illustrated by this editorial today in The Hill (along with numerous others), there is a diverse chorus of people and businesses calling for corporate income tax reform. And, as highlighted in ALEC’s annual Rich States, Poor States report, people and businesses will vote with their feet and move to places that make it easier to succeed. In fact, lowering tax rates can sometimes even lead to more tax revenue because it spurs economic growth. As states become more competitive in their tax climates and reap the rewards of economic growth, the federal government should take a lesson and make the tax structure of the United States more conducive to robust economic growth.