House Democrats Mislead Taxpayers On Corporate Taxes

On February 11, the House Ways & Means Committee is set to hold a hearing pillorying the Tax Cuts and Jobs Act (TCJA) for its corporate income tax changes, titled “The Disappearing Corporate Income Tax.” Taxpayers should not be fooled — the tax reform law was necessary to return the American market to a level playing field with other developed nations.

Prior to the passage of the TCJA, the American corporate tax rate was an extreme outlier when compared to the rest of the developed world. So much so, in fact, that lowering the rate by 14 percentage points has put the American tax rate roughly in line with other developed countries, not at an advantage.

Before the TCJA lowered the corporate tax rate, the United States’s 35 percent corporate tax rate (not even including state and local corporate taxes) was the highest in the industrialized world. With the TCJA in place, the American corporate tax rate is now 21 percent, roughly equal to the European Union average of 21.77 percent. Factoring in state and local taxes, the United States still has a total average corporate tax rate of just under 26 percent.

But the corporate tax cut was important for more than just global competitiveness. Though corporations pay the actual tax, at least half of the incidence of the corporate income tax falls upon labor in the form of lower wages and employment. Regardless of how they are often framed in popular discourse, reasonable corporate tax rates are crucial for the middle class to thrive.

Undoubtedly House opponents of the tax reform law will parrot another frequent, and inaccurate, criticism of the TCJA. A narrative that refuses to die is that corporations are getting away with murder in the tax code because of the TCJA. This comes from a few cherry-picked examples of large corporations that end up with low corporate tax liability in a given year.

These stories are misleading, and almost entirely unrelated to the passage of the TCJA. Amazon and Netflix, two of the most prominent examples, had low tax bills because they benefited from common, bipartisan deductions that were established long before TCJA  — mainly net operating loss carryforwards, the research and development credit, and the deduction for stock-based compensation.

Broadly speaking, the corporate taxes paid by a single company can fluctuate wildly, and looking at a single year of tax data is rarely instructive. That doesn’t stop people with an axe to grind, however.

Expect another common misunderstanding of the TCJA to weasel its way into the Ways & Means Committee hearing room on February 11 — the idea that the TCJA “gave back” more to corporations than taxpayers.

This is simply untrue. First, tax reductions are not “giveaways,” they simply let a person or a company keep more of what they earned. But the TCJA also contained over $1.1 trillion in individual tax cuts compared to about $330 billion in corporate tax cuts. The data clearly shows that the 2017 tax reform law was first and foremost a tax cut for individual taxpayers, 80 percent of whom received a net tax cut.

The Ways & Means Committee can attempt to spin the tax reform law however it wishes, but the facts will remain the same: the TCJA was an important step in restoring fairness and competitiveness to our tax code.