Would Chopping Corporate Taxes Pump Up Growth?

The National Association of Manufacturers picked either the perfect time to call for a reduction in the corporate tax rate or the worst possible moment. It's tough to tell.

On the same day, Jan. 26, the Congressional Budget Office projected that the federal budget deficit would hit $1.3 trillion in the current fiscal year, a small decrease from fiscal 2009 because the economy is showing signs of growth. This is hardly a cause for celebration, however, given the astounding level of red ink."Last year's deficit was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest," according to the CBO. "Moreover, if legislation is enacted in the next several months that either boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year's shortfall."

Earlier this week, President Obama unveiled a three-year spending freeze on some domestic programs issues, which some pundits say won't work. Wall Street's confidence in Obama's ability to manage the economy continues to erode even as he fights for the reappointment of Federal Reserve Chairman Ben Bernanke. Surveys of investor sentiment, though, present a murky picture at best, and the president has a chance to regain some lost ground in tonight's State of the Union address.

But NAM has a plan to jump-start the economy. Like many conservative groups, it believes that corporations pay way too much (about 39.1% on a statutory basis from state and federal sources) to Uncle Sam. That's the second-highest in the industrialized world. Only Japan's 39.5% is higher, according to the Tax Foundation, which wants the U.S. to follow the lead of other countries and lower its corporate tax rates.

350,000 More Jobs

The picture is brighter for U.S. companies when the considerable number of deductions is included, creating the so-called effective tax rate. Figuring out these rates is difficult given the wide variety of tax breaks corporations receive, but it's usually lower. In 2008, Goldman Sachs (GS) made headlines when it was revealed the hugely profitable investment firm paid an effective rate of 1%. Since every company's tax situation is unique, it's difficult to get a picture of their tax payments based on these more realistic circumstances.

But according to an analysis by NAM and the Milken Institute, reducing the U.S. corporate income tax to match the average of other industrial countries could help boost real GDP by $375.5 billion and create an additional 350,000 manufacturing jobs. NAM also favors establishing a permanent research and development tax credit, modernizing the U.S. system of export control and "making major investments in energy and transportation infrastructure." A NAM spokeswoman could not be reached for further comment.

Ironically, NAM head John Engler was governor of Michigan from 1991 to 2003, when the auto industry began the steep decline that would have been tough to head off even with the most generous government help imaginable. Media reports indicate that Engler, a Republican, is mulling a run for the U.S. Senate for 2012.

State of the Union Proposal

"The case for that proposal is weak," says Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. "Companies hire people because they are selling stuff."

Indeed, tax breaks don't necessarily create economic growth. Last year, NCR (NCR) moved its corporate headquarters to Georgia after 125 years in Ohio, even though the Buckeye State offered it $31.1 million in tax incentives to stay put. That does not mean that they have lost their appeal. Bloomberg News is reporting that Obama will propose in tonight's State of the Union address extending through 2010 a temporary tax incentive that encourages businesses to accelerate purchases of equipment.

"Extending the break, which expired Dec. 31, would save companies that make purchases of equipment such as tractors, wind turbines, solar panels and computers a total of $38 billion over this year and next by allowing a 50% write-off of the cost in the first year," the news service says.

Temporary and Transplanted Jobs

Using tax breaks to attract businesses has its pitfalls as well. For instance, a Tax Foundation analysis of state assistance to motion picture producers found them to be lacking.

"Based on fanciful estimates of economic activity and tax revenue, states are investing in movie production projects with small returns and taking unnecessary risks with taxpayer dollars," the report says. "In return, they attract mostly temporary jobs that are often transplanted from other states."

Still, calls by NAM and its allies to slash corporate income taxes will grow louder in coming weeks as Republicans sense Obama's political strength eroding and their's rising. For NAM to get its way, it will need to convince Congress that lowering corporate taxes will benefit Main Street, and that'll be a tall order.
Read Full Story