The Impact of Corporate Tax Rates on Global Competitiveness and Economic Growth
Jay D. Hatfield | Founder, CEO and Portfolio Manager at Infrastructure Capital Advisors
The large reduction in the U.S. Federal corporate tax rate, from 35% to 21% enacted in 2017, has been criticized as a contributor to income inequality and not relevant to economic growth. We believe investors and politicians should not focus just on the absolute magnitude of the Federal reduction and, instead, analyze the U.S. total corporate tax rate in the context of global competitiveness and the resulting impact on economic growth.
According to the Tax Foundation, the current combined Federal and State average U.S. corporate tax rate of 25.8% is the 108th lowest in the world, out of 223 countries. The U.S. combined rate exceeds that of the global average of 22.6%, the OECD average of 23.5%, the EU average of 21.7% and even exceeds the Scandinavian average rate of 21.1%. The global trend since 1980 has been continued dramatic reductions in corporate tax rates with the average rate declining from over 40% to today’s low rate of under 23%. Consequently, the U.S. reduction in 2017 was not an outsized reduction but rather a required reduction in rate to restore the U.S. to level that was somewhat competitive with the global average but is still high on a relative basis.
It is critical for the U.S. to have a combined corporate tax rate that is competitive with the rest of the world as global corporations can move operations and taxable income easily between countries, potentially impacting U.S. employment and both direct and indirect tax revenue. Corporations employ more than half of all U.S. private sector employees. Consequently, U.S. corporations are the most important engine of Federal tax revenue as not only do they pay corporate income taxes but generate the majority of all tax revenue when you consider their employees pay enormous personal, payroll and sales taxes. This dynamic is why you have seen the ongoing global reduction in corporate tax rates, including Scandinavian countries, where only 3% of total tax revenue comes from corporate taxes, relying instead on the employees of their corporations to pay high personal, wage, consumption and property taxes.
Global corporate tax rates impact savings and investment, which in turn impacts country growth rates. The savings rate of a country is almost 50% correlated with the country’s long-term GDP growth rate. The current U.S. combined corporate tax rate of 25.7% is in the 3rd quartile of tax rates globally. The first quartile of countries has an average corporate tax rate of 12.4%, with an average GDP growth rate of 2.9% with the 2nd, 3rd and 4th quartile averaging 22.5% and 2.2%; 27.3% and 1.5%; and 32.4% and .9%, respectively.
As the U.S. emerges from the pandemic and considers options to finance the debt incurred to fight it and to finance future infrastructure investment, it must consider the long term impacts of a potential corporate income tax rate increase against its global competitiveness. High relative corporate taxes can have a large negative impact on employment, growth and total tax revenue collected from corporations and their employees.
However, there are changes to the corporate tax code, such as eliminating certain loopholes, that could raise substantial revenue without impacting global competitiveness. Examples include limiting the bias for investment in physical assets by curbing accelerated depreciation and limiting excessive subsidies for real estate development and investment.
The most efficient approach to raising tax revenue would be to raise the Federal tax on gasoline to finance public transportation infrastructure, as it would provide an incentive for consumers to reduce driving-related pollution and raise a large amount of revenue without impacting savings and investment. The increase in the gasoline tax could be pared with an increase in the earned income tax credit or direct cash payments to lower income and middle-class consumers to offset the regressive aspect of the gasoline tax.
Mr. Hatfield has three decades of experience in the securities and investment industries. At ICA, he is a portfolio manager and manages a series of hedge funds. Mr. Hatfield was previously a portfolio manager at SAC Capital (now Point72 Asset Management), running a portfolio focused on income securities. He joined SAC from Zimmer Lucas Partners, a hedge fund focused on energy and utility sectors, where he was head of research.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.