Unemployment Rates and Theory

¶ … Rubin (2016), President-elect Trump has vowed to stop inversions, but has offered a novel solution: a lower corporate tax rate. Trump's theory is that a lower corporate tax rate would "sharply reduce companies' incentives to take a foreign address," (p. 1). The corporate tax rate is currently at 35%. Trump and his pick for Treasury secretary, Steven Mnuchin, suggest that 15% would generate sufficient federal revenues while discouraging companies from establishing themselves abroad or circumventing taxes through loopholes. One of the ways foreign-based firms evade taxes is through earnings stripping, essentially borrowing from themselves to generate interest deductions built into the current codes (Rubin, 2016). This helps the companies avoid paying the 35%, also pushing their income into jurisdictions with lower tax rates (Rubin, 2016). Having a foreign address offers additional benefits, and many companies have multiple inversions, something that came to light when Pfizer announced their plans to go offshore by using subsidiaries. The government responded to the internal borrowing with an earnings stripping rule that "relabeled some internal debt as equity and imposed steep compliance costs," (Rubin, 2016). Countries have also been expatriating their earnings to avoid paying American taxes (Bischoff, 2016). High corporate tax rates sound good in theory: extract money from the wealthiest to help reduce inequitable wealth. Yet the numbers tell a different story. High corporate tax rates do not promote wealth equity, and nor does it promote a healthy Treasury.

The 35% corporate tax rate is exorbitant. Compared with other countries, it ends up being on par with Chad, Congo, and Zambia -- hardly emblems of good governance, let alone strong economic stability and growth (Bischoff, 2016). Among wealthy nations, only Belgium comes close with a corporate tax rate of 33%. More sensible nations like Canada has a high but manageable corporate tax rate of 25%. Japan's is 22%, Germany's is only 12.5%. Clearly, corporate tax rates are not linked to good governance or economic growth.

Somewhere in the range of 15% seems manageable. In fact, after inverted companies weasel their way out of tax loopholes, their effective tax rates come in at about that rate (Bischoff, 2016). With a cleaner, simpler system in which companies based in the United States remain in the United States, overall Treasury revenues could end up climbing in the long run because more companies would be opting out of oversees presence in favor of the more business-friendly climate domestically. To make up for the theoretical 25% difference, the tax codes would be simplified so that there would be fewer legal loopholes and more oversight into collecting the Treasury's just dues.