Lowering Corporate Taxes: The Key To Unlocking National Prosperity?

by Rakuten Super Logistics | eCommerce Strategy

2018 Tax Cuts and Jobs Act

“A rising tide lifts all boats”—President John F. Kennedy, 1963

For as long as there has been a debate regarding the level of taxation for both American workers and companies, advocates of lowering corporate tax rates have proffered the idea that lower taxes will spur business growth, and that when businesses prosper so, too, will their employees, thus creating national prosperity.

More than 50 years ago, President Kennedy—renowned for his love of all things nautical—advocated the analogy that a “rising tide” of economic prosperity for American businesses would ultimately benefit all Americans. To that end, Kennedy advocated lowering corporate tax rates from the existing 52 percent rate down to 47 percent; eventually, the Kennedy-era debate over lowering corporate tax rates resulted in the Revenue Act of 1964, and established a reduced corporate tax rate of 48 percent for US businesses.

Fast forward to 2017, and after a rancorous tax debate in the nation’s capital, American businesses saw their existing 35 percent federal corporate tax rate dramatically slashed to 21 percent; and while much has changed over the decades since JFK first proposed cutting US corporate taxes, one constant has remained—the argument by tax cut advocates that lowering corporate tax rates would translate into a national prosperity felt by both businesses and their employees.

And so, in the wake of debate in the nation’s capital, the “Tax Cuts And Jobs Act of 2017” is now the law of the land, and most American businesses will experience a substantial decline in their federal tax burden commencing this year.

That reality once again raises the inevitable question: what will—and what should—American businesses do with their federal tax savings?

Leveling The Global Playing Field For US Businesses

Supplanting the argument in favor of the new, lower corporate tax rates is the belief by many economists that, in an era of global competition, lowering corporate tax rates in America will not only induce national prosperity, but ensure that American businesses can successfully compete in the international marketplace.

While some nations still have a lower corporate taxation rate than the new US rate, experts agree that the average corporate tax rate among America’s global competitors is approximately 25 percent; prior to the new tax law, advocates for lowered US corporate taxes expressed concern that the 35 percent US marginal corporate tax rate placed American companies at a considerable disadvantage when competing in the global market.

The complaint that higher US corporate taxes placed American businesses at a competitive disadvantage internationally has echoed for many years.

However, according to Forbes, lowering corporate tax rates to 21 percent will now place the US in the lower strata of international corporate tax rates; by way of comparison, several European Union (EU) countries–as well as Australia and Japan–continue to proffer corporate tax rates higher than the new US rate. (Please see infograph)

2018 Corporate Tax Rates by Country

The Great Debate: How To Spend Corporate Tax Savings?

Not unlike the 1960s, the tax debate–both then and now–boiled down to how US businesses will utilize their newfound ‘savings’ resulting from the drastic cut in federal corporate taxes.

Proponents of the tax cut believe that one of the most significant economic benefits from the 2017 tax legislation will be the repatriation of hundreds of billions of dollars of multinational corporate money returning from overseas. That huge influx of repatriated corporate cash, in turn, has the potential to create national prosperity and considerable economic stimulus throughout the US economy.

Meanwhile, with a 14 percent decline in federal taxes, the question remains as to how US companies can best utilize increased revenue resulting from the 2017 tax law.

Economic experts believe there are numerous options available for US businesses deciding how best to use the savings derived from the 2017 federal tax law.

These possibilities include, but are not limited to:

  • Employee wage increases (an option selected by several Fortune 500 firms)
  • Increased employee benefits
  • Re-investment in their respective business or expanding current operations
  • Community Investment/Non-profit Donations
  • Increased research and development
  • Investment in startup businesses, venture capital companies
  • Buyback of stocks (for public companies)

To the delight of their employees—and advocates of the new tax bill—some American businesses moved swiftly to answer that question; in the airline sector, for example, both American Airlines and Southwest announced they would be paying one-time, $1,000 bonuses to all their respective employees; American executives said the move would ultimately cost the company in excess of $130 million.

Having earned over $1.6 billion during the first nine months of 2017–Southwest was also poised to immediately benefit from the government lowering corporate tax rates; as a result, the company said that it made a corporate decision to immediately pass some of the benefits from its tax savings on to its employees. For its part, Walmart also announced it was raising its starting wage to $11 per hour, citing savings from the new tax law as the impetus for this action.

In addition to the aforementioned companies, industry leaders in various business sectors, including AT&T, Bank of America, and Comcast have also revealed plans to give their employees one-time bonuses and pay raises, all as a direct result of the government lowering corporate tax rates.

Still, even in the wake of the new law, some debate continues as to what to expect by way of benefits from lowered corporate taxes. Proponents of the 2017 tax law are adamant about its positive effects, such as increased wages and national prosperity—citing proof such as a recent survey by the National Association of Manufacturers, in which 54 percent of respondents said the tax cut would result in increased hiring; meanwhile, some skeptics point to their own evidence, including a poll of CEOs by the Business Roundtable that found that only 43 percent of chief executives said they planned to increase hiring in the next six months.

But some companies foresee more than just financial benefits and national prosperity to be derived from the corporate tax savings.

Corporate Tax Law Provides Marketing/PR Opportunities

In addition to the financial benefits from a reduced corporate tax rate, the new tax bill also proffers the potential for ‘non-financial’ corporate benefits—particularly in the areas of public relations and marketing; companies choosing to ‘share the tax wealth’ with their employees, or communities, could receive immeasurable positive media coverage, as well as related corporate marketing opportunities as a direct result of their altruism.

For example: advocates of the new tax law—up to, and including, the President himself–have helped publicize the corporate magnanimity of businesses giving employees ‘tax-related bonuses’; this corporate generosity is proof, they say, that the new tax law will indeed benefit more than just companies and their shareholders; the positive publicity also serves to place the affected businesses in a positive national spotlight.

While it’s still too early to measure the marketing and public relations benefits for companies choosing to share their federal tax savings, there can be little doubt that many of those businesses will strive to maximize their return on investment by taking every opportunity to remind both customers—and regulators—of their generosity.

As the nation awaits the full economic impact of the new federal tax law, at least one thing remains certain: while the debate in Washington over the 2017 corporate tax cuts may be over, the debate over the size of the “rising economic tide” resulting from lower business taxes has just begun.