Congressional Republicans showed reluctance on Monday to president-elect Donald Trump’s plan to use a 35 percent tariff to punish American companies that outsource jobs abroad at a time when Trump’s economic plans are getting scrutinized before his presidential inauguration next month.
House Majority Leader Kevin McCarthy told reporters on Monday that a better way to keep American jobs and to grow the American economy is through reworking the tax code and lowering the corporate tax code.
Speaking on Fox News on Monday, House Majority Leader McCarthy commented about the need to create more incentives for companies to remain located in America by lowering corporate taxes.
To restore American competitiveness, we must lower our corporate tax rate from the highest in the industrialized world. pic.twitter.com/AvmlqUjJKz
— Kevin McCarthy (@GOPLeader) December 5, 2016
The U.S. corporate income tax rate at the federal level is currently 35 percent and is the third highest general top marginal corporate income tax rate in the world at 38.9 percent after combining the state rate.
Although the U.S. corporate income tax rate ranks among the highest in the world, many corporations have discovered ways to use tax loopholes to pay much less in federal taxes.
One of the widely used approaches corporations have adopted to pay less in taxes is through offshore tax loopholes which allows corporations to shift profits to tax havens in overseas subsidiaries.
According to Americans For Tax Fairness, U.S. corporations hold $2.1 trillion in profits offshore that have not been taxed in the U.S.
Apple made $74 billion from 2009-2012 on worldwide sales (excluding the Americas) but paid little in taxes in many countries and is paying a corporate tax rate of around 25 percent in the U.S. in Q3 2016, not including its profits held offshore.
Earlier this year, the European Commission ruled that Apple had to pay 13 billion in unpaid taxes to the Irish government but government officials in Ireland claimed they don’t want the money.
Sixty years ago, corporations paid 1/3rd of federal revenues but now just pay 1/10th of federal revenues.
President elect Donald Trump has proposed to aggressively lower the corporate tax rate from 35 percent to 15 percent which would represent a monumental drop in taxes and a huge concession from House Democrats to accept that type of major cut and reduction in federal revenues.
Analysis from the Tax Policy Center that calculated the impact of Trump’s reduction in marginal tax rates for individuals and businesses has concluded that his ambitious tax cut plan would lower federal revenues by 9.5 trillion over the first 10 years before accounting for added interest costs and macroeconomic feedback effects.
Undoubtedly, it will be challenging for Trump to convince Congress to accept a 15 percent corporate tax level.
Many fiscal economists have already rejected Trump’s 15 percent corporate tax proposal, believing that it won’t happen, and use 25 percent as a starting point.
Some Republicans downplay analysis from Tax Policy Center showing major tax revenue shortfalls through a Trump tax cut plan and overestimate the level of sustained economic growth that occurs in the economy by lowering taxes.
According to economic research from Moody’s in 2008, temporary tax cuts, such as the Bush Tax Cuts, can boost GDP but longer term permanent tax cuts are less effective.