President Trump unveiled his plan to reform individual and corporate taxes. At first reveal, the media focused its attention on the news that the President wants to lower the corporate tax rate to 15% from its current level of 35%, highest among developed economies. Knee-jerk reactions are predictable.
As you observe the sound and fury from politicians in Washington, here are some considerations to keep in mind.
Politicians love to tax companies. Companies don't vote. If Washington politicians could, they would increase taxes on companies, not lower them. A tax on a business is dressed in camouflage so voters won't notice it. But the steady flow of American companies moving out to friendlier tax shores has convinced even many Democrats that corporate tax rates are too high. Grudgingly, and with a lot of rhetoric about "fair shares", politicians are coming around to realize that the best policy for the US economy is to lower corporate tax rates.
There is a saying in economics that "companies don't pay taxes, they merely collect them." This important insight reminds us that the burden of taxes levied on companies really falls on its customers (in higher prices), its employees (in lower take-home pay), and its owners (in lower dividends). People, not "companies", ultimately bear the burden of corporate taxes. When the President proposes to lower the tax rate for companies, he is really proposing a "tax cut" for people; for customers, workers and owners.
To say that companies don't pay taxes is true (in the sense above) but it is also misleading. The public might mistakenly think that companies get a free-pass when it comes to paying for all the government we enjoy. Nothing could be further from the truth. The fact is that government depends on businesses for all its funding. Sales taxes, property taxes, income taxes, payroll taxes, corporate income taxes, and capital gain taxes; each of these sources of government revenue flows from profitable businesses. For government to thrive, businesses must thrive.
Businesses generate sales which generate sales taxes. Thriving businesses raise property values, and hence raise property taxes. Businesses pay wages and salaries to employees, who in turn pay income and payroll taxes to government. If a business dies, then sales, jobs, property values, and taxes die with it. If a business is successful and earns a profit, governments take a significant portion of that too. In fact, government takes two helpings from corporate profits; one helping when the company pays corporate income taxes and another helping when shareholders pay taxes on company dividends.
The obvious conclusion is that public policy should not harm the ability of businesses to thrive. Public policy should enable businesses to bring the most benefits possible to communities; especially jobs, jobs, jobs.
Certainly state governors realize this. They actively try to "poach" businesses to relocate to their state by offering tax incentives through an "industrial development agency". President Trump knows it too. His plan to lower corporate tax rates to 15% will put a stop to other countries trying to lure American companies with the prospect of lower taxes. His plan will preserve the corporate tax base here rather than see it continue to slip away to other countries. President Trump is putting up a big sign to companies in the rest of the world to invest in America and to bring jobs here.
There is more to like in President Trump's plan to lower the corporate tax rate to 15%. You probably won't hear about this from politicians or the media. There is a sinister reason politicians love to tax companies. Companies are not only the source of funds that keep government thriving, but companies, through their lobbyists, are also a rich source of campaign contributions that keep politicians thriving. Nothing shakes the money tree like a proposal to create a tax loophole for an industry; except, perhaps, a proposal to eliminate a tax loophole for an industry. It's a bipartisan shakedown. Whichever side a politician takes, they can harvest campaign money from corporate lobbyists.
But President Trump's plan to lower the corporate tax rate to 15% will disrupt the shakedown game. At a 35% tax rate, companies might be willing to hire lobbyists to plead their case for special tax or regulatory favors. But at a 15% tax rate, companies will have more productive ways to spend their money. If President Trump's plan to lower corporate tax rates is successful, the money tree will be nothing more than a stump.
Don't expect politicians to like this. They won't. Don't expect the media to report on it. It's too complicated to fit into their "narrative" de jure. But this could be the greatest step yet taken by President Trump to "drain the swamp".