S&P: Cut Corporate Taxes to Create 10M New Jobs

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Published June 26, 2014

| FOXBusiness

There’s a growing, bipartisan consensus that the berserk complexity of the U.S. tax code stymies job growth.

Our tax code has grown to be 25 times the length of "War and Peace,” notes Pete Sepp, executive vice president of the National Taxpayers Union.

Lowering corporate tax rates and simplifying the maniacally-convoluted tax code is slowly catching fire. S&P Capital IQ has provided an estimate on just what would happen to the U.S. economy if the effective corporate tax rate paid by S&P 500 companies dropped to Switzerland’s average, effective rate of 22.4% from our current 32.3%.

S&P Capital IQ says that slashing the corporate tax rate could create 10 million jobs or more over a five-year period. It would also improve the historically poor 62.8% labor participation rate, a level last seen in the recession era of 1978, back up to the 67% level the U.S. had before the financial crash and the same rate in the mid-to-late 1990s. During those periods, GDP growth averaged over 4% per year, more than double the rate it's been over the last 12 months.

Cutting the corporate rate would start to turn the U.S. into a tax haven and might bring home huge chunks of the $2 trillion in U.S. corporate cash parked overseas—the cheapest stimulus of all. S&P Capital IQ now says cutting the corporate rate would increase business investment, jobs and wages.

The trend is steadfastly in the other direction. S&P’s Howard Silverblatt already calculates that S&P 500 companies have seen their overseas sales grow to 48% of all revenue--fast approaching 50%. 

Nearly 50 U.S. companies have pulled stakes and planted headquarters overseas in recent decades to escape the double whammy of the high 35% U.S. statutory tax rate and the taxation of foreign profits (taxed here and over there).

Medtronic (MDT) recently said it would plunk its headquarters down in Ireland, already a low-tax haven, after it buys Covidien (COV), which is located there. Pfizer (PFE) made headlines when it planned to move its main base to Great Britain when it made a bid for the UK’s AstraZeneca (AZN), a deal since pulled. Walgreens is holding a press conference in the coming weeks to reportedly announce it is moving overseas, too.

But Congress’s answer to the fleeing corporations is to complicate the U.S. tax code even more by rejecting these corporate moves overseas if foreign shareholders don’t own 50% or more of the company and if management control stays in the U.S. Others argue the corporate rate should be raised to 48%, which would wipe out roughly 15 million jobs, S&P Capital IQ warns.

Using 2013 data, S&P does indicate that government tax revenues would fall by about $91 billion annually if the corporate rate was chopped to Switzerland’s level. But it countered that the revenue plunge would be offset by the creation of 10 million jobs.

Compare that $91 billion to the $2.8 trillion Washington pulls in annually in tax revenues, and you can see the corporate tax revenue haul is less than 5% of federal tax revenues. Corporate tax revenue only amounts to 10% of the overall federal pie, S&P calculates. Individual income and payroll taxes make up 80%, with the balance coming in from things like excise taxes.

Given that 80% figure, shouldn’t the strategy then be focused on creating more working individual income taxpayers?

To be sure, taxes are not the only reason companies pull stakes and move overseas. They make the move also to be closer to their consumer markets, raw materials and energy; and because it’s cheaper to transport their goods or provide services, S&P notes. 

But cutting the corporate rate to 22% “would be a game-changer,” Michael Thompson, managing director of Global Market Intelligence at S&P Capital IQ has said. “If the United States were one of the most competitive tax domiciles in the developed world, how would that change the math in a CEO’s or a CFO’s head? It would change it a lot.”

Ten million additional jobs sounds like a stretch given that companies, if they paid at that lower tax rate, would have to double the growth rate in jobs to get there. The lead X-ray blanket of D.C. policies has the U.S. economy creating only about 200,000 new jobs a month.

But 10 million is small when you consider there are an estimated 92 million people out of the labor force. Thompson of S&P Capital IQ says: “The approximate 10 million-job target should be achievable and may even be conservative.”

Cries of corporate welfare arose two years ago after President Barack Obama proposed cutting the corporate rate to 28%, but abated somewhat when ideas floated around Capitol Hill to also shut corporate loopholes and raise taxes on the upper bracket payers, even though the latter would slam small businesses who file at that rate.

Yes, there are acres of preferential loopholes given to companies in the U.S. tax code. But even with all that, the average U.S. effective tax rate for S&P 500 companies still sticks at around 27% to 29%, higher than what companies pay in other countries in the Organization for Economic Co-operation and Development, notes NTU’s Sepp.

And S&P Capital IQ has already reported data used by the New York Times that the total, all-in effective tax rates—federal, state, and local—paid by S&P 500 companies from 2007 to 2012 ranged dramatically, from zero to almost 35%.

Watch this, too: The average effective all-in tax rate for the poster boys of tax breaks, the “Big Oil” industry, is, wait for it, 37%, according to S&P, higher than the effective rate for the S&P 500 companies. Exxon Mobil has paid a 37% effective, all-in tax rate, versus 39% for Chevron and 74% for ConocoPhillips.

Oil and gas companies can’t physically move operations, like oil wells, overseas to tax havens, like a GE or an Apple can.

Even more interesting, S&P Capital IQ says it studied the effective tax rates for more than 7,500 corporations in various global locations for the period between 2000 and 2012. “Over the past 13 years of sampled data, global corporate effective tax rates declined on average,” it says.

In addition to Switzerland, the report highlights Spain and Brazil as stand out advantageous tax locations, while Japan, Italy, France, and the U.S. appear to be less desirable. Countries that have seen their average effective tax rates trend lower in recent years include the U.K. (the U.K. is a tax haven?), Canada, Germany, the Netherlands, and Australia, “while France's average rate moved markedly higher to 33.5% as of 2012 from a recent low watermark of 29.5% in 2008.”

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http://www.foxbusiness.com/markets/2014/06/26/sp-cut-corporate-taxes-to-create-10m-new-jobs/