Don’t Expect an Investment Boom if the Corporate Tax Rate Is Cut

It appears as though the rate on US federal corporate profits is going to be reduced. Although US corporations may be considered ‘people’ in terms of the First Amendment, they are not ‘people’ when it comes to paying taxes. Corporations are de facto tax collectors, not taxpayers. Real people ultimately pay the taxes in one way or another on the profits that corporations earn. So, why don’t we relieve corporations of their tax-collecting duties and tax their shareholders directly on the accrued profits of corporations in which they own shares as Laurence Kotlikoff, Boston U. econ professor, and 2016 write-in presidential candidate, has suggested? If this were done, the tax on dividends and, thus, the double taxation of corporate profits would be eliminated. Alas, this kind of tax reform is not in the cards, but a cut in the corporate profits tax would be a step in the right direction.
One of the arguments being made in favor of the cut in the corporate profits tax rate is that it would unleash a torrent of investment on the part of corporations. In turn, this increase in business investment would enhance the potential real growth in the economy and would increase the capital-to-labor ratio. An increase in the capital-to-labor ratio would raise the productivity of labor, which eventually would lead to an increase in real wages.

This post was published at FinancialSense on 12/12/2017.

 

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