Why Corporate Tax Savings Should Be Held To A Higher Proportion?

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Following the “Tax Cuts and Jobs Act” (TCJA) passed on December 20, 2017, the corporate tax rate in the US stands flat at 21 percent, effective since January 1, 2018. The proponents of TCJA claim that corporate tax in the US is much higher than that of other countries, hampering their propensity to invest. They further implied that reduction in the corporate tax would be a massive boost to the ‘competitive’ strength of the US companies, which in the long run would benefit American families.

The reality, is, however, far from these claims. Ever since the TCJA has been functioning, questions have arisen regarding how will it affect shareholders and the average American. Now, corporations – even though in a much less open manner – have come forward to bring to light the impact that TCJA has had in the first quarter earnings. Since the corporate tax rate has fallen from 35% to 21%, it has resulted in an excess earning of 15 billion dollars for the largest US corporations just in the first quarter alone. Going by this figure, estimates suggest that by the end of 2018, organizations in the US will pay nearly 79 billion dollars less to the federal government. Furthermore, assumptions suggest that in the upcoming ten years, this amount is likely to reach 330 billion dollars.  

 

Individual firms such as IBM, JP Morgan, and Walt Disney, have disclosed their first-quarter earnings and it is nothing less than shocking. JP Morgan stated that despite having a 2 billion dollar pre-tax income, it paid 240 million dollars less income tax in 2018. Likewise, the Walt Disney Company reported a net tax benefit of 1.6 billion dollars following the TCJA.

 

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So, what does this mean?

It means that the funds that would previously go in the public sector are now rapidly moving into the private sector. And thus, the burden of creating a sustainable economy is increasingly shifting towards the private sector. However, till date, the ‘corporate responsibility’ of organizations and businesses have primarily been about promotion and reputation rather than actionable and operational. Latest survey reports have unraveled stark findings –

  • According to GlobeScan-SustainAbility, a meager 6% of corporations report their actual results for being declared as ‘leaders’ in the business;
  • A McKinsey survey maintains that less than 11% of organizations state that incorporating sustainable factors within the infrastructure brings value to their businesses;
  • According to a BSR survey, less than half the organizations think that measuring their progress based on the UN Sustainable Development Goals will be a priority for them.

The proponents of TCJA hold that reduction in the corporate tax will improve the living standards of Americans by fostering employment opportunities, boosting overall productivity, and facilitating a more progressive income distribution pattern. But this is apparently not the case.

  1. It would do little or nothing for employment generation.

A reduction in the corporate tax rate would primarily benefit the rich as they are unlikely to increase their consumption after tax cuts as compared to lower or middle-income families. In fact, reducing the corporate tax rate is considered to be the least effective form of fiscal support.

  1. It would not magically boost productivity.

The corporate tax cut could only ‘theoretically’ increase the productivity if the US economy were seeing employment at full swing and if the tax cuts were paid for by spending cuts or an increase in the rates of other taxes. But as we all know, this is not the present situation in the US.

  1. It would not channel income progressively.

According to CBO 2016 report, the corporate income tax is a progressive tax where the top 1% of households account for almost 47% of the corporate income tax. Hence, the corporate tax cut would only increase the post-tax income in well-off families.

 

At present, the US tax system is guilty of having too many loopholes, and the focus should be on closing those loopholes rather than giving tax benefits to large corporations. When the bigger picture is assessed, it can be clearly seen that corporate tax reduction is only going to benefit the more affluent class while doing nothing for the average American. Thus, the tax reform should stress on increasing the corporate tax instead of decreasing it. This way the money would flow into the public treasury and can be utilized for the benefit of many and not just a select few.

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