Effects of reduction in corporate tax rates

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Casselman, the author of this publication, reflects on the potential consequences of a tax plan proposed by a US senator that aims to reduce the corporate tax rate. Via this publication, the author gathers diverse perspectives from citizens from various political divides, as well as their hopes from the proposed proposal. He illustrates how the focus has been diverted to the impact of the tax cut on average income earners/workers in an effort to warm them up to the new policy; whereas, the tax cut on companies is projected to raise employers' earnings, thus raising individuals' annual incomes (Casselman, 2017). Accordingly, this paper will look to establish the possible effects of such a move on the economy of the U.S and its Citizens.

According to the Taxation foundation’s tax and Growth Model (TAG) model, a reduction in corporate tax on the U.S economy is estimated to be constructive. To arrive at this hypothesis, the model uses tax policies and rates on other large economies such as the UK and Canada to predict the effects different tax cuts would have on the US economy (Auerbach p.7). The model also uses the Organization for Economic Co-operation and Development (OECD) average corporate income tax which represents the proposed income tax of 25% that is to be realized (Hodge p.1). Furthermore, it elaborates how a reduction in tax would have immediate adverse effects on the Gross Domestic Product (GDP) as it would lead to a decline in the GDP. However, the decrease in GDP would almost gradually be overcompensated for by the increase in GDP that would arise in the successive years (Hodge p.1).

Consecutively, a reduction in corporate tax would mean a decrease in expenses on Corporates’ side. Therefore the reduced tax burden would lead to increased investments by most firms. In turn, increased investments will lead to an increase in company assets meant to provide resources to push for more profits. Accumulation of profits would, therefore, lead to an increase in the government’s share of the profit which is in the form of corporate tax (Hodge p.1). On the same note, most US firms tend to direct their investment and businesses to other countries due to the high tax costs. The tax cut will entice them to redirect such investments/ business back to the US (Cottarelli p.12); this would not only, lead to an increase in government’s revenue and GDP but would also increase the competitive position of the entire economy internationally.

Similarly, an increase in the net income after tax made by companies due to the discounted tax rates would sequentially lead to an increase in workers’ wages. Also, new investment opportunities would create employment opportunities for the American Citizens. Both results will eventually raise the standards of living of the income earners thus leading to economic growth (Semuels p.1). The model, therefore, confirms that workers will also be the other big winners once the 25% tax discount is implemented.

Despite, all these positive effects, it is crucial for the lawmakers to consider some factors that would arise due to the tax cut. As indicated above, the reduced corporate tax will increase the amount of spending for both corporates and workers; increase in spending will lead to an increase in the amount of money circulating in the economy, thus raising the issue of possible inflation in the country. It is therefore crucial that the law-makers research on how to avert and control such possibilities as their effects would be detrimental to the economy of the country. Moreover, reduction in GDP would also lead to delay in paying back of government debt which would plunge the country into debt (Cottarelli & Jaramillo p.24).

Works Cited

Auerbach, Alan J., et al. "Macroeconomic Modeling of Tax Policy: A Comparison of Current Methodologies." (2017).

Casselman, Ben. “Lower Corporate Taxes, Higher Wages? Voters Are Skeptical.” The New York Times, The New York Times, 14 Nov. 2017, www.nytimes.com/2017/11/14/business/economy/taxes-polls.html?rref=collection%2Fsectioncollection%2Fbusiness-economy&action=click&contentCollection=economy.

Cottarelli, C., & Jaramillo, L. Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies. Review Of Economics And Institutions, 4(2), 1-25 (2013), http://dx.doi.org/10.5202/rei.v4i2.113

Hodge, S. The Economic Effects of Adopting the Corporate Tax Rates of the OECD, the UK, and Canada - Tax Foundation. Tax Foundation. 27 November 2017, https://taxfoundation.org/economic-effects-adopting-corporate-tax-rates-oecd-uk-and-canada/

Semuels, A. Would Cutting Corporate Tax Rates Really Grow the Economy?. The Atlantic. 27 November 2017, https://www.theatlantic.com/business/archive/2016/10/would-cutting-corporate-tax-rates-really-grow-the-economy/504845/

October 25, 2022

Business Life

Subject area:

Tax Planning Income Tax

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