Term Paper: Dropping or Lowering Corporate Taxes

Pages: 10 (2676 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Economics  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] S. business climate. London's Economist Intelligence Unit placed the U.S. second, behind the Netherlands for the 'best place in the world to conduct business' in a recent study" (1). However, coming in second does not have an automatic claim on the highest living standard without it is the best tax climate. In fact, the U.S. tax system is a negative factor in attracting flows of investments. We have a high corporate tax rate and the most complex way to figure federal government taxes placed on corporations in the U.S. These are reasons why the corporate tax rate should be lowered.

Steven M. Fazzari says, "Tax reform that reduces tax rates on capital income, no matter how successful it is in reducing the upper cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the U.S. economy" (1). Many believe that lowering taxes will help boost capital formation and growth. This is found in the belief concerning the supply-side of economics. Steve Forbes believes that the high-tech "boom of the 1980s" is related to the 1970s capital gains tax cuts. Some complain that when the capital gains tax rate was increased so did the economy. "This kind of logic is used to justify tax cuts on capital income earned disproportionately by the wealthy" (Fazzari 1).

According to a new Tax Foundation Special Report, America's corporations have paid more income taxes since 1992, and federal corporations may top $200 billion in 2000. This reports strengthens those who assert that making corporate tax cuts would help the economic condition. According to Tax Foundation Chief Economist John S. Barry, author of the study, "Every dollar in taxes paid by American business actually comes out of the pockets of customers, employees, and shareholders" (Tax Foundation 1). Economists feel that the $200 billion in taxes have an effect of workers, owners, and customers. "American corporations spend roughly 1.2 billion hours, equivalent to nearly 582,000 full-time employees, filling out IRS forms and schedules annually. Assuming an average hourly wage of $34.66, total corporate income tax compliance costs run nearly $40.3 billion annually" (Tax Foundation 1). Berry says these costs are not necessary costs of doing business.

Proposals of Corporate Income Tax

There are several proposals to reduce the taxes of corporate income tax. The double taxation is one. Another one is to delete the corporate tax. Some policymakers and economists suggest changing the corporate rate from 35% to 25% as a way to boost the economy. Cutting the top corporate tax rate would cost $900 billion over ten years when the associated dept service costs are included (Friedman and Lav). Many feel that corporate tax reductions would make the problems worse. However, proponents argue that it would improve the long-term earnings for corporations that would increase stock prices. This would increase consumer spending about $60 billion.

Others argue that reducing the corporate tax would result in the federal government losing revenue of over $900 billion over the next ten years. They feel the stock prices will not rise from cutting corporate taxes. In fact, they think the corporate rate cut would push up long-term interest that would offset the positive effects the tax cut would have on stock prices.

Another problem will be that it would only benefit some corporations. The majority of corporations would not benefit. "That is because a corporate tax rate cut benefits only businesses that are profitable and owe corporate income tax. Corporations that fail to generate a profit this year would owe no tax and thus receive no benefit from the rate cut, yet these are the firms more likely to be in need of assistance during the economic slowdown" (Friedman and Lav).

The argument that the corporate rate cut would lower prices for goods and services is unlikely. Most economists believe corporate taxes flow to the owners of stocks and other capital, not reducing prices of goods and services. "Even if some portion of the benefit did flow to consumers, $900 billion would be a very high price to pay for what could be a few billion dollars in short-term stimulus" (Friedman and Lav). If you consider losing $900 billion for the short-tern goal of boosting consumer spending of $60 billion, is it worth it?

Need of Stimulus

There may be need to have an appropriate stimulus. It will be important for the policyholders to be aware of not worsening the economy in a long-term federal budget outlook. To guard against this, the stimulus should:

Be available for individuals and businesses to spur spending.

It should be used for a short, fixed period of time.

It should be related to the immediate problems the economy is having.

It should stem from sound policy in its own rights.

If you look at the corporate tax cut, it fails on all four counts. More time should be spent deciding how to reduce corporate taxes or perhaps to do so on a temporary basis. Or how to arrange corporate taxes to affect all businesses including "S" corporations.

Future Research Concerning Corporate Taxes

Many disagree about corporate income tax. There are many different arguments about the corporate tax. More research should be done to define what reductions would benefit the nation. Researching the following might be ways to begin:

Lowering the taxes for a short period of time.

Taxing all corporations including "S" corporations.

Ways to help companies that pay the most corporate tax.

Deduction for the cost of new investments.

Conclusions

Corporations are taxed under a graduated tax rate structure that ranges from $0 to over $10,000,001. Many believe the corporate income tax should be dropped, but evidence shows that this might hurt the economy more than help it. Economists say the corporate tax is one of the most poorly understood of all taxes. Some companies are taxed while others are not which includes those falling under "S" corporations. The economy may need stimulus to help the budget and the country. However, cutting the corporate tax permanently does not seem to be the answer. More research should be done before cutting corporate income tax.

Works Cited

Bonura, Chris; Finn, Kathy; Kamerick, Megan; McNulty, Ian; and Stuart, Stephen. "Tax-free Corporations" New Orleans City Business. 12/25/2000. Vol. 21. Issue 27. p.11

Business Tax Cuts a Logical Component of Economic Stimulas Package" New Report on Corporate Income Taxes Shows Rising Collections. Federal Tax Burdens and Expenditures by State. http://www.taxfoundation.org/corporatetaxes.html

Current Corporate Income Tax Developments (Part II). Tax Advisor. April 2002. Vol. 33 Issue 4. p.234

Edwards, Chris. "Reducing Business Tax Penalties to Spur Growth" February 13, 2002 http://www.cato.org/cgi-bin/scripts/printech.cgi/dailys/02-13-02-2.html

Federal Corporation Taxes" The Learning Network Inc. 2001. http://print.infoplease.com/ipa/A0005946.html

Friedman, Joel & Lav, Iris. "A Permanent Corporate Tax Rate Cut: The Wrong Medicine For Short-term Economic Ills" Center on Budget and Policy… [END OF PREVIEW]

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