Would Cutting Corporate Taxes Jumpstart  US Economy?

As the battle in Congress continues over Bush-era tax cuts on personal income, a less-noticed debate is brewing over cutting the corporate tax rate, which at 35 percent is the second-highest in the world.

US Capitol Building with cash
US Capitol Building with cash

The arguments for both are the same: tax cuts—whether for individuals or corporations—will kickstart economic growth and create jobs at a time when the recovery appears to be stalling.

A bi-partisan tax bill making its way through Congress calls for slashing the corporate rate to just 24 percent.

Sen. Judd Gregg (R-NH), one of the bills’ co-sponsors, said he believes a “competitive” corporate tax rate is crucial to “growing jobs domestically.”

“We see this as a jobs bill,” Gregg said in a recent interview with CNBC.com. “We think it will create a great burst of economic activity.”

Though many economists agree a higher rate makes the U.S. less competitive over the long term, they are mixed about whether cutting the corporate rate would have any immediate impact.

The reason, they say, is that cutting corporate taxes isn't focused specifically on expanding operations or creating jobs.

“You could create more opportunity for job creation,” said John Canally, an economist for LPL Financial. “But (corporations) could take that money and invest overseas. You can’t tell them what to do.”

A cut in the corporate rate, added economist Alan Auerbach, is “well worth thinking about,” but as a “longer-term argument.”

“It is not targeted per se,” Auerbach said. “It’s a fair assumption, but if you are worried about employment, then focus directly on employment.”

Instead, tax incentives—like the payroll tax exemption enacted last March to encourage hiring—are textbook tax approaches to economic downturns, says Doug Shackelford, a tax professor at the University of North Carolina Kenan-Flagler Business School.

“These targeted jobs credits, that’s what supposed to work,” Shackelford said. “So if you told me you have one tax trick to play, I’d say we are playing the right trick right now.”

Shackelford agreed the U.S. rate is “long-term unsustainable,” particularly as more nations— including Japan, which at 40 percent has the highest rate—cut their corporate rates or plan to do so.

“The rest of the world has come down a lot, so now we are an outlier on the high side,” said Shackelford. Still, he added, “I think it’s a real leap to say that, oh well, because a nickel of my profits won’t be taxed I’m going to go out and hire…that’s really stretching it.”

The Obama administration appears mixed on the subject.

In a recent interview with CNBC, Treasury Secretary Timothy Geithner disputed criticisms that the U.S. corporate rate is too high, contending that the effective tax rate—after deductions—is “about average.”

A 2010 World Bank study pegged the U.S. effective tax rate at 27.9 percent, far higher than the average of 16.8 percent among developed countries.

Geithner added that while he welcomes taking “a look” at proposals to cut the corporate rate, the administration’s economic agenda currently favors “targeted” investment incentives for businesses both large and small.

For now, Sen. Gregg continues “shopping around” his tax plan in Congress. While he says it has gotten good reception, he admits the bill has little hope of seeing a vote before January, when the Bush cuts expire and a new Congress is seated.

“It takes a long time,” he said.