My loyal reader, by the title you might be thinking that today my article might be centered in Keynes and his economic policy ideals towards taxes, but no… today it’s not your luck day. I know and I’m conscious that that would be a really interesting debate, and that many of you will enjoy reading it, and sooner or later we’ll have time to talk about that, but today I want to write about a more actual theme that doesn’t come from 70 years ago, and that nowadays is essential in all the economy’s minister desks, I hope you know what I’m talking about. Lately this last two months, in the news or even in the day to day and into economic conversations, nobody stopped talking about corporate tax or even its effects and causes in the economy, but why? It seems like economists are really excited about it, and have reasons for it. Recently, the Hungarian Prime Minister; Viktor Orban has displayed his intentions on decreasing the corporate tax rate to 9.5%, having the lowest one in the EU, followed by Ireland, which actually maintains its rate in 12.5%. Let me tell you that Spain is not an example to follow in this case, and that today talking about it might be really boring, I like action, and action is that the USA will provide to the labor market with Trump’s intentions of decreasing brutally the corporate tax rate by more than 20 percental points in just one year… from its actual 35% to nearly 15% over the companies’ income.
THE AMERICAN DREAM
In first place, let me say that by reducing the global tax rate on income and in contrast to what many people think, this would help to improve the American tax system and rise the revenues of itself. We shouldn’t be negative when we are told by the new director of the FED, that the highest corporate tax of the major powers of the world (USA’s 35%) will be lowered down to the OECD average 25%, or even to its Canadian partner rate- which is 15%, leading to greater innovation in all the sectors of the economy and will help to shift profits generally upwards. Should be kept in our minds, that by cutting corporate taxes, the USA will be much more competitive within international markets, generating higher aggregate demand and benefiting the larger part of Americans and their wages. Internally, into the country, the new lower rates will reduce the costs of production capital in many firms, mainly manufacturers, which will rise the investment levels into that particular market, at the same time it will contract market share from economies as the Chinese. With higher money being in circulation in the USA, productivity will increase due to more incentive for labor and higher salaries for the jobs in the secondary and tertiary sectors, producing consequently much better standards of living in the mean term. The FED has always been the greater impediment for decreasing tax rates, and ever since Reagan’s mandate, the corporate tax rate has stayed near to 40% in all the aspects of companies and in all the different sector, which we have to say was beneficial in preventing the 200’s technological bubble or nowadays renewable energy bubble, which has caused the price of oil to bounce around like a ball during the last two years. External competition from labor markets around the world is clearly present in economics nowadays in comparison to the USA, which in contrast to its 35% tax rate on corporations can find the OECD mean corporate tax around 25%, followed by the actual 20% UK tax rate, which after the Brexit tries to attract more companies and workers to their system, trying to stabilize the economy. And of course, not to talk about the Canadian 15% rate or even the Irish 12.5%. To be sincere, if I was American I would be mostly centered in the Canadian corporate tax, which is their mainly competitor in production, labor and even investment markets, due to their similar conditions, natural resources, proximity and liberal economic policies developed in the last mandate by Justin Trudeau, which will elevate the USA economy in a mean term of 5 years with an increment of 4.3% in growth according to the GDP statistics by the TAG. If the government wanted to protect itself from several rises in prices, they might want to adopt UK’s 20% rate, which will end up with a consistent and persistent growth rate of 3.3% added value to the GDP, and at the same time will reduce the risk of inflationary pressure., as the economic growth will be set up in a more moderate and consequent way, protecting also government tax income and even lifting it up.
HERE WE CAN OBSERVE THE VARIATION IN CORPORATE TAX RATES IN THE USA ALONG THE YEARS:
LABOUR, WAGES, CONSUMERS & LIVING STANDARDS… EVERYTIHNG’S RELATED
Secondly, we have seen able to see through experience how a lower tax rate on corporations will reduce prices of natural goods and materials, reducing business costs and freeing companies from their production expenses, allowing to increase supply in the market, as in the EU, where stock rates have risen by 6.5% over the last decade. As we have previously mentioned, by lowering tax rates, investment and economic growth will be lifted in the economy, which will give place to greater wages for the human capital and improved working conditions for many, as we have observed that in the vast majority of developed countries, productivity is highly related to the final wages received by workers, and larger incentives lead to higher productivity of labor forces. In case of decreasing the US corporate tax down from 35% to the 20% settled in the UK will rise over time full time employment by 2.8% in the mean term, generating 600,000 new jobs just in the first year, according to a study from the TAG. But lowering corporate tax won’t be only beneficial for entrepreneurs and international investors, as it will also have many positive effects for the local population and low skilled workers. Having a higher economic growth and an increased tax income will allow the government to descend tax rates also on income tax, which will provide workers with much more disposable income and purchasing capacity, rising living standards. We could also plan for three different corporate tax rates, which will be eventually variable in dependence of the scale of benefits from the diverse corporations, which will allow companies to give out higher dividends to their shareholders or even reinvest their profits for further increments in production, increasing the capital of the firm in the market. There are many beneficial effects of lower tax rates, and specially decreasing the corporate tax, which will be good for all income levels, and even though low-income people will benefit much more of it due to lower prices and higher wages and employment levels, also by lowering it down to levels of the UK, or even Canada and Ireland will make the tax income for the government escalate up to 3% of added nominal value, getting to nearly an increment of 4% with a corporate tax of 15 percental points.
HERE WE CAN OBSERVE THE “LAFFER” CURVE, WHICH DEMONSTARTES THA BY INCREASING TAX RATES OVER THE EQUILIBRIUM WILL GENERATE LOWER TAX INCOME FOR THE STATE:
In conclusion, by reducing the tax rate to 15%-20% will make the economic growth of the USA to be boosted to a 3.3% extra added to the current growth rate over the next five years. Workers will be one of the most benefited groups for this decrease in tax rates, and mainly in corporate, which will delegate on an increment in employment with 600,000 jobs being created just in the first and a half year of mandate, and wages of previously stablished employment will rise by 3.6% over two-three years in the best case, and just by 1.9% in the worst of the situations. As corporate tax is cut down, the GDP will increase consequently and in a consistent way, which would be transferred into higher tax income for the government, as the creation of companies and higher wages will finally result in lower prices and higher consumption levels, following as previously set up the “Laffer” model. And just as I started the article, I promise that wouldn’t have imagined myself giving out a Keynes’s quote to end a liberal theme article, but there’s one that adapts perfectly to the situation, and relates the complete truth, independently from your economic ideals, and that in our favor enforces today article’s title: “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”