Given the positive economic impact of a lower corporate tax rate, legislators should avoid considering corporate tax as a potential source of additional revenue. Raising the corporate tax rate would reverse one of the key provisions of the Tax Cuts and Jobs Act aimed at promoting growth and reduce the global competitiveness of the United States. Economic evidence suggests that it is workers who bear the final burden of corporate income tax and that corporate income tax is the most damaging to economic growth – it is not advisable to increase this tax rate. However, tax cuts may not have been the only reason for the increase in growth. The Federal Reserve also lowered the benchmark federal funds interest rate from 6 percent to 1.75 percent in 2001. Lyndon Johnson then pushed through JFK`s tax cuts on February 26, 1964. LBJ lowered the top tax rate from 91% to 70%. It lowered the corporate tax rate from 52% to 48%. For example, an increase in debt could be the result of tax cuts or increased spending.
The Federal Reserve could have cut interest rates, an expansionary monetary policy instrument. Imposing a tax on a non-price-sensitive good or service, such as cigarettes, would not lead to major changes such as plant closures and unemployment. Studies have shown that a 10% increase in the price of cigarettes reduces demand by only 4%. The tax on luxury goods in 1991 was also 10%, but yacht manufacturers claimed an 86% drop in sales and thousands of jobs lost. In any case, the tax transfer should always be taken into account when developing tax policy. Because of the ideal of justice, cutting taxes is never an easy task. Two different concepts are horizontal justice and vertical justice. Horizontal justice is the idea that all people should be taxed equally. An example of horizontal equity is sales tax, where the amount paid is a percentage of the item purchased.
The tax rate remains the same whether you spend $1 or $10,000. Taxes are proportional. While tax cuts stimulate growth, tax increases are expected to cripple the economy. But while Bill Clinton`s 1993 tax hike did not cause the economic boom that followed, experience shows that raising taxes on high-income households should not interfere with faster economic growth. The new permanently reduced corporate tax rate will make the U.S. a more attractive place for businesses to attract investment and prevent profit shifting to low-tax jurisdictions. The lower rate encourages new investment that increases productivity and leads to higher levels of output, employment and income in the long run. By permanently lowering the corporate tax rate in the Tax Cuts and Jobs Act, the legislature has succeeded in making the United States a more globally competitive place for new investment, jobs, innovation and growth.
A second concept is vertical justice, which translates into the principle of solvency. In other words, those who can pay the best should pay the highest taxes. An example of vertical equity is the federal income tax system. Income tax is a progressive tax because the portion paid increases as income increases. In this case, ARRA`s tax cuts were probably more effective than monetary policy in stimulating growth. The Fed had already lowered interest rates to 0% in 2008. Estate tax cuts reduce the amount heirs pay on their parents` estate. Increasing the corporate tax rate increases the cost of investment in the United States.
With a higher tax rate, some investments would not be made, resulting in less capital formation and fewer lower-paying jobs. Once the tax cuts are in place, they are difficult to reverse. What for? A tax cut reversal is similar to a tax increase and has the same impact as a tax increase. Members of Congress risk re-election if they support a tax increase. The unified framework, developed by the White House and Republicans in Congress, includes some growth-enhancing elements, such as expenses – instant amortization of the total cost of new capital investment. But many aspects of the plan will dampen growth. Reducing corporate tax rates, for example, will result in a significant loss of revenue, which will increase deficits. It offers unexpected subsidies for the returns companies now receive for investments they have made in the past. It doesn`t help drive growth – you can`t stimulate investment in the past. Capital formation, which results from investment, is the most important force for increasing incomes in all areas. [8] More capital for workers increases productivity, and productivity is a major determinant of wages and other forms of wages.
This happens because when firms invest in additional capital, the demand for labor to work with capital increases, and wages rise as well. [9] Because of these economic impacts, the reduction in the corporate tax rate has been the most growth-friendly of all the sustainable elements taken into account in the tax reform debates. [10] Trump`s tax cuts would most likely continue the long trend of deficit-financed tax cuts that have little or no negative impact on long-term growth.
