Corporate Taxes and the Economy


Last week I wrote about small business and marginal tax rates. My position was that your average small business owner is not going to see a huge effect of Barack Obama’s proposed tax increases on incomes over $250,000. Business Pundit reader DRob made a great point that I want to address here.

It comes down to jobs…. You say that the National Federation of Independent Business found only 14% of small businesses have an annual income of $200,000 or more… So 86% of small businesses are not affected by Obama’s tax increase. Great! But what percentage of jobs do you think that 86% creates? The majority are being created by that 14%… It’s convenient that you just use $260,000. Let’s change it to millions.

While I’d been sucked into the Joe-the-six-pack-slamming-Plumber scenario, DRob reminded me that we need to look at the economy as a whole. But are the companies making more money really creating more jobs? I’m not sure how those numbers play out. What I do know is that companies making employing more people and making millions are much more likely to be incorporated. And corporate taxes are a whole different game.

We (and everybody else) have focused on individual income tax rates. (This covers many, many small businesses who do not incorporate.) But what about those corporate rates? Remember ‘corporations’ are not just Exxon and Mobil. A corporation could be a dog groomer, window washer, or the pizza joint on the corner. Or even that Joe guy.

As for corporate tax rates, it’s clear that McCain would decrease the top rate to 25% over time. However, I haven’t found what he’d do for the rest of rates. Based on our current corporate rate structure, you can’t assume all the brackets would drop so low. Here’s what we’ve got now:

Corporate Income Tax Rates–2008, 2007, 2006, 2005, 2004, 2003
       Taxable income over     Not over      Tax rate

          $         0        $    50,000        15%
               50,000             75,000        25%
               75,000            100,000        34%
              100,000            335,000        39%
              335,000         10,000,000        34%
           10,000,000         15,000,000        35%
           15,000,000         18,333,333        38%
           18,333,333         ..........        35%




According to the Brookings Institution, wide economic impact (including job creation) looks very different under the two candidates’ plans:

The impact of the tax code on economic activity under each candidate’s policies would differ in several important ways. Under Senator McCain’s proposed policies, the top marginal rates (35 percent on individual income and 25 percent on corporate income) would be significantly lower than under Senator Obama’s plan (39.6 and 35 percent, respectively). McCain’s reduced individual and corporate rates could improve economic efficiency and increase domestic investment, but the larger future deficits would reduce and could completely offset any positive effect.

In contrast, Senator Obama’s proposed new tax credits could encourage desirable behavior, particularly if the childless EITC and payroll tax rebate encourage additional labor supply among childless low-income individuals. However, he would also direct new subsidies at an already favored group—seniors —and an already favored activity—borrowing for housing—which could probably be better directed elsewhere.

It seems to me that McCain seeks to meet our challenges from a numbers perspective whereas Obama wants to use the tax code to influence individual and corporate choices.

The big question is what do we vote for – the Economy, or for our own myriad personal economies?