CNBC: Flaherty Says Reduce Corporate Income Tax

Would a cut in the corporate tax rates really help create jobs? I debate this question today with David Callahan of Demos. CNBC hosts are Tyler Mathison, Sue Herera and Michelle Caruso-Cabrera. Here’s a transcript:

Michelle Caruso-Cabrera: Two Congressional committees will tax up tax reform this term. President Obama is trying to mend fences with Wall Street and the business community including the Chamber of Commerce’s Chairman, Tom Donohue – today clamoring for lower tax rates on corporations. Would a cut in the corporate tax rate really help to create jobs? David Callahan is a Senior Fellow at Demos and author of Fortunes of Change, the Rise of the Liberal Rich and the Remaking of America and Peter Flaherty is President of the National Legal and Policy Center. Gentlemen, good to see you. David, let me start with you. Would lowering corporate taxes help to create jobs in America?

David Callahan: I don’t think so. I mean corporations are already sitting on a mountain of cash – a trillion dollars – they have record profit. The reason they are not creating jobs is that there is not consumer demand.

Michelle Caruso-Cabrera: Peter, your response to that. We see record amounts of cash. We keep waiting to see when on earth corporate America is going to put all that cash to work.

Peter Flaherty: There may be a dearth of consumer demand, but if big companies are sitting on cash, I would rather they do it here in the United States rather than in some other country. The United States has the highest corporate tax rate in the world, now that Japan is cutting theirs. In recent years, countries all over the world have been cutting their tax rates. The European Union for instance has gone from an average rate of about 38%, a little higher than where we are now at 35%, down to an average of 24. So it is time for the United States to join the party.

Michelle Caruso-Cabrera: So you are arguing that if we had a lower tax rate vis-à-vis other countries than we would see more job creation here as opposed to companies moving them overseas and tying to capture the better tax rates over there. David, what is your response to that?

David Callahan: Well, the World Bank did a study recently that the effective corporate tax rate is in fact below that of some of our top competitors like China, Japan and Germany. As Peter well knows, the tax rate is a meaningless figure because of all the different breaks – the effective tax rate is much lower than the statutory tax rate. And I think we should really be having a conversation about how many corporations don’t pay any taxes at all. There is a GAO report that came out two years ago that found that two thirds of US companies paid no taxes whatsoever between nineteen ninety nine and two thousand and five.

Michelle Caruso-Cabrera: Peter I saw you nodding your head. I saw you nodding your head. Do you agree with that? I mean should we clean up the tax code and lower the corporate tax rate and get rid of all these exemptions all these companies have?

Peter Flaherty: Yes. Those are all valid and accurate points. I think that if you are going to reduce corporate taxes, you should close a lot of the loopholes. A lot of our tax code now is based on preferential treatment for certain industries. It is going to be a big step for President Obama. For instance, the alternative energy industry is based almost wholly on subsidies and tax breaks…

Tyler Mathisen: The same could be said for the conventional energy industry.

Peter Flaherty: …And look at General Motors – they got a very nice $45 billion dollar carry forward tax loss that was granted to them under very dubious conditions by the Treasury.

Sue Herera: Peter and David, even if you do reform the tax code, you have states, California and Illinois…

Peter Flaherty: Illinois.

Sue Herera: …and many others that are hiking in state taxes to corporations and companies dramatically.  Would that not off set any kind of move on a national level to either lower the corporate tax rate or close some of those loop holes?

David Callahan: Corporations are very good at evading taxes in states as well as in nations. I mean one of the reasons that a lot of companies are not paying taxes is because they are using these foreign subsidiaries to hide their money and keep it off shore. You know that General Electric for example, had ten billion dollars in pre tax income in two thousand nine and paid zero taxes. They even got a refund. Goldman Sachs – two billion dollars in profits in two thousand eight…

Michelle Caruso-Cabrera: But David, you are almost arguing – that is almost to the point then, why not make it easier – why not incentives to bring all that money on shore? Right? Get rid of it? Wouldn’t we rather have that money here? Rather than not be here at all?

Peter Flaherty: Yeah, a lower tax rate means better compliance. Sue makes a good point. As we sit here today, in Illinois, the new Governor, Pat Quinn is trying to jack the corporate tax rate to 10.9%. How could we possibly compete with other countries when the states will counter any benefit we get from a cut in the federal corporate tax rate?

Michelle Caruso-Cabrera: But these companies could move to different states right? I mean that is the wonderful thing about state law.

Tyler Mathison: And do. And do.

Peter Flaherty: Well it is good for South Carolina.

David Callahan: The bottom line is that there is not a great correlation between job creation and corporate profits and tax rates. You know, during the fifties and sixties we had the top corporate tax rate of fifty percent. During the Clinton years where we created twenty million jobs and had soaring corporate profits we had the same corporate tax rate. This notion that somehow changing the corporate tax rate is some magic formula is not true. In fact it is demonstrably false.

Peter Flaherty: It is not magic, but it does work.

Tyler Mathisen: Peter how would you react to the idea that we should eliminate the corporate tax entirely? Why do corporations deserve – why should they pay tax at all?

Peter Flaherty: Many people have suggested – I don’t think it is such a bad idea. After all corporations really do not pay taxes, they just collect it on behalf of the government.

David Callahan: Look, if you get rid of the corporate tax income – income tax and that money has to be made up some place else.

Peter Flaherty: I would argue that the tax burden in all the developed countries, whether they have a low corporate tax rate or not is too high. What high taxes and high revenues have done have just spurred high levels of debt. Public debt is public enemy number one. It is a threat to the world financial system. And if we were serious about taming debt, we would tame the amount government is able to raise.

Sue Herera: David, you know, we talk to a lot of CEOs here, on and off the record and regardless, to your point, maybe lowering the corporate tax rate would not create jobs, but all the CEOs that we talk to view it as a disincentive for them to invest in the United States if the corporate tax rate remains where it is – even if – I mean psychologically they are opposed to it. Doesn’t it work as a disincentive to them?

David Callahan: You know the effective corporate tax rate is just a lot lower than what we have been talking about. As I discussed earlier, the World Bank has shown that our effective tax rate is competitive with other nations. It was one point five trillion dollars in corporate profits last year. They paid two hundred and twenty five billion dollars in taxes. That is a fifteen percent tax rate. I do not think that is excessive.

Michelle Caruso-Cabrera: All right, gentlemen. We have got to go, I am so sorry.

Peter Flaherty: What are you suggesting, David? If there is no correlation, why don’t we raise it to a 100%?

Michelle Caruso-Cabrera: Gotta go. Good idea.

Peter Flaherty: Thank you.

Sue Herera: Touché.