Dear Joe Manchin - Want American Businesses to Invest in West Virginia?
Without a high corporate income tax rate, Boeing never would have built commercial jets...which changed the world!
Most Americans, when they hear that President Joe Biden wants to raise the corporate income tax to 28% to pay for his infrastructure plan, think that means that every business in America is suddenly going to be hit with some kind of surcharge.
That couldn’t be further from the truth.
Businesses pay corporate income taxes on profits, not on revenue. If a company does $1 billion a year in business, but only makes $1 million in profit (the money left over after the bills are paid), they’re only taxed on that million dollars of profit.
And there are lots and lots of ways to reduce that profit. The main one, that American businesses used throughout the era from the 1930s until the 1980s, when the top corporate tax rate averaged around 50%, was to invest money in new products, build new factories, expand production and pay their workers well.
All of those activities are 100% tax-deductible, along with things like research and development, marketing, and pitching in for the community by building parks or supporting Little League.
While these kinds of investments build and strengthen businesses and their relationship to the places where they do business, they also reduce profits and thus reduce tax liability. If a company doesn’t want to pay income tax, all they have to do is not show a profit.
As an added incentive, corporate income tax rates, like personal income tax rates, are progressive. The more profit a company shows on their books, the higher the rate they pay in incremental steps.
In 2002, for example, while the top rate on profits over $18 million was 35%, companies that only showed a $50,000 profit paid corporate income tax at a 15% rate.
Every small business in America knows this, which is why very few small businesses in this country pay anything consequential in income taxes at all.
At the end of the year, small and family-owned businesses take whatever’s left over in their checking account that would show as profit-that-could-be-taxable and use that money to invest in tax-deductible new equipment or expand their business.
Having run small businesses for over 50 years, I can tell you that figuring out how you’re going to use what’s left over to build your business in a tax-deductible way is an annual December tradition from New Hampshire to California. And the companies that sell everything from copy machines to computers to office furniture know it: December is typically their boom month.
The corporate income tax keeps businesses on the straight-and-narrow. Which is why it’s no coincidence that the time of greatest prosperity for both American business and the American middle-class came when the top corporate income tax rate was at its highest.
A high corporate income tax rate, in fact, produces a pressure on businesses to invest rather than simply pass out money to shareholders and executives (both can be taxable) or squirrel it away offshore. It’s an important and necessary pressure that drives businesses to do the right thing whether they want to or not.
Given this simple reality, taking the top corporate tax rate up to 28% when it was around 50% through most of the 40s, 50s, 60s, 70s and early 1980s, and was 35% from Reagan’s time until 2018, seems downright pathetic.
Even at this rate, the top corporate income tax rate will be lower than it has been at any time since World War II (other than the past three years). We really should be talking about 35% to 50% as a top rate if we want to achieve the kind of corporate growth and wage increases America saw during the years before Reaganomics.
Skeptical? Consider this example:
Boeing was, until just after WWII, basically just a military contractor that had tried and failed with commercial prop planes. But the corporate income tax was really high and they’d made a lot of planes — and a lot of money — with/for the war. So the company’s CEO, William McPherson Allen, decided to invest the money that would have otherwise gone to the corporate income tax into an entirely new field: Jet aircraft for airlines.
As author Sam Howe Verhovik wrote for The New York Times, the rest is history:
What Allen clearly saw was that now was the perfect time to plow a huge amount of company money into an audacious new development project. All of it would be a legitimate business expense, reducing the “profits” for the coming years, but so what? That was all money that would have basically gone to the government.
In other words, if there had never been a high corporate income tax at the end of WWII, there never would have been a Boeing 707. And, of course, that means there would never have been the 727, 737, 747, 757 or 767: all revolutionizing air travel and making billions for Boeing.
This is a reality well-known by other countries. Check out US versus international corporate tax rates, per the New York Times and Andrew Ross Sorkin, et al - the US is waaay below any other developed country, and it’s hurting us.
Joe Manchin and a few other corporate-funded Democrats seem fairly hysterical about raising the top corporate tax rate. They should relax.
If they really want American business to invest in America, if they want the factories in West Virginia to expand, the way to encourage that behavior is to give them an incentive to invest in that very expansion.
Raise their corporate income tax rate!
I really do not understand what the Republican Party has done for West Virginia. It is in the bottom 10 for just about everything and the bottom 5 in major issues like health and education. When will they see the light and quit voting Republican? https://www.usnews.com/news/best-states/west-virginia
I asked my CPA, who is my best friend of 50 years, and a staunch liberal, about this. Here is the gist of his response:
"The point is that small businesses don't pay much tax at all.
The idea that paying workers more and investing in property and equipment will save you money is mostly bullshit because a deduction doesn't save you taxes 1:1. It's a deduction that reduces your tax based on your rate. If I gave my employee a raise of $10,000 it would save me $1,400 in taxes but I'd still be out of pocket $8,600. A corporation being taxed at 28% federal isn't going to go out and start spending money to get a tax break. They're probably going to cut back so their bottom line (profit after paying tax) remains the same."
Perhaps a corporate tax structure that gets their investment-qualified deductions a lot closer to the 1:1 ratio would be more acceptable to politically active corporations, as well as more realistically helpful toward raising the nation's median income, and reducing the gap, in real life.