Yes, the Statutory Corporate Tax Rate Matters — It Drives Cronyism
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As Congress prepares to take up tax reform, a major issue will be the corporate tax rate. To many, the debate that will ensue will appear familiar. To advocate for corporate tax cuts, Republicans will point out that the United States has the highest statutory corporate tax rate among major economies . Democrats, on the other hand, will point out that the effective tax rate that corporations pay is often much lower than the statutory rate as an argument to target tax exemptions for businesses. Ironically, they are both correct — and so the statutory tax rate needs to be cut so that cronyist tax carve-outs can be eliminated.

The problem with setting such a prohibitively high tax rate is that corporations can reasonably argue that they need tax cuts in order to remain in business in the United States. And argue that they do. Corporations spent $838 million on lobbying expenditures in the first quarter of 2017 alone, a number that will surely grow as legislation to reform the tax code begins to emerge. The return on this “investment” is substantial; one report found that last year corporations benefited from more than $185 billion in tax breaks.

This system contains many perverse incentives. Corporations should seek profit by creating value for consumers, not through congressional fiat. Unfortunately, recent history has shown Congress to be a very profitable customer. A 2015 report found that, over the previous 15 years, Congress doled out more than $68 billion in corporate welfare through targeted tax breaks and grants. This amount does not even include the trillions of dollars that Congress has offered out in favorable loans and loan guarantees.

This same report also highlights another issue with the current tax cut-dependent system. Approximately 67 percent of the grants and tax breaks went to a small group of 582 large corporations, and 21 corporations received $500 million or more. Many smaller corporations cannot afford armies of lobbyists, and therefore are left out in the cold when Congress starts crafting tax breaks.

A convoluted tax code filled with tax breaks to make up for an overly high statutory rate is a headache even for corporations that are eligible. The Tax Foundation estimated that in 2016 corporations spent a total of over 2.8 billion hours filing their corporate income tax returns, which translates to an economic loss of $147.4 billion. Instead of investing money in new business ventures and products to provide the consumer, corporations are spending money employing lawyers to cut down their tax liability as much as possible.

A high corporate tax rate means that U.S. multinational corporations also have an increased incentive to keep hundreds of billions of dollars in profits overseas rather than subject them to U.S. taxes, a problem known as the “lockout effect.” This tactic further increases the going rate for good tax lawyers, disadvantages domestic corporations, and represents a headache for congressional budget hawks.

The solution is simple — cut and simplify the tax code. This approach would be fairer, reducing the benefits of access to government. Corporations need to be made to believe that they will pay the same tax rate whether they have one lobbyist or a hundred. And eliminating this cronyism is economically impractical until the statutory corporate tax rate is cut.

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