Furry Brown Dog

Dedicated to the memory of my canine friend…

Why cut corporate taxes?

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It is assumed by many that corporate taxes are economically unhealthy, even among my friends who also advocate a cut in GST.  Hence the need to cut them in a recession to spur growth and save jobs.  A quick working definiton to start with: Corporate taxes are taxes levied on a company’s profits.  Remember this.

In Singapore, the corporate tax rate was cut this year with the unveiling of the new Budget.  It stands now at 17%, down from 18% earlier.  There were no similar cuts in GST or even on personal income taxes.  In this post I’ll attempt to address some arguments regarding corporate tax cuts and their supposed effects on the economy.

The typical argument for cutting corporate taxes, from the point of view of the citizenry, is that corporations are greedy and would simply pass on any costs to their consumers and labour. Hence, the argument goes, cutting corporate taxes reduces the need or incentive to do so, benefiting consumers and workers.  However, this argument assumes that the corporation would be satisfied by the larger profits obtained by the tax reduction and not attempt to cut their workers’ wages still.  Does anyone have any evidence that corporate tax cuts have helped save jobs or reduce the need for cutting workers’ wages?

The argument that companies would simply pass on extra costs to consumers holds no water as well.  Should a company attempt to do so by raising prices, product demand would fall due to the law of demand.  Raising prices would simply decrease demand of its products and make the company uncompetitive.  This is an elementary point which some corporate tax adherents have yet to realise.  The argument that companies would pass on costs to its workers (on the other hand) by cutting their wages has more merits.  However the beneft accrued to workers, if any at all, relies on an unproven hypothetical assumption that without the corporate tax reduction, workers would have had their salaries slashed even more.

Secondly (this is a more important point), in a recession and especially for struggling companies where a corporate tax reduction is supposed to help, cutting corporate taxes would have no effect on the company. This is simply because corporate taxes are levied on profits, not revenue.  Hence cutting corporate taxes from say 35% to 25%, a considerable reduction, would have zero measurable effect on companies who have been posting losses all along, such as GM, Chartered Semiconductor.  In fact, one would not be too mistaken if they claimed that cutting corporate taxes would simply increase the profit margin of already profitable companies who have much less need for cutting costs.

Thirdly, a cut in corporate taxes (as with all taxes) necessarily implies a fall in tax revenue for the government. To make up for the loss in revenue the government could either raise other kinds of taxes, or cut spending.  For Singapore at least, there are virtually no social safety nets in place when compared to generous pension schemes and unemployment benefits of other countries.  Hence when it comes to cutting spending, one may find that there is comparatively little to cut, unless one is prepared to reduce spending for programs which confer generous social benefits on the populace such as education subsidies (tuition fee grants), civil service cuts etc.  Indeed cutting spending in these areas would have a larger negative impact on the people than the benefits accrued to the companies’ workers (if at all) when corporate tax rates are cut.

How about the unpalatable alternative of raising taxes?  In like manner, it depends exactly on which taxes are raised.  An increase in income taxes and GST would directly hurt the consumers for whom the corporate tax cut is supposed to indirectly help. It is apparent that the effects of raising taxes are much more likely manifested than the supposed benefits of cutting corporate taxes.   The GST is effectively a regressive tax on consumers since poorer people spend a larger portion of their meagre income on consumption, so any increase would hurt them the most.  An increase in GST would also drive down already depressed consumption rates in Singapore and has the added effect of inflating the prices of goods sold, thereby hurting the manufacturing companies.

In Singapore it was estimated by PriceWaterHouseCoopers earlier this year that the cut in corporate taxes from 18% to 17% would incur an estimated loss of tax revenue of about S$400M – S$500M annually and may lead to a GST increase:

This rate reduction will deplete the Government revenue by S$400 million to S$500 million a year, which seems to set the scene for an impending increase in GST when the Singapore economy recovers later.

Indeed one may deduce from the above that while cutting corporate taxes may benefit some companies (usually those that don’t need help because they are already profitable enough to warrant corporate taxes in the first place), raising GST directly hurts those suffer the most in a recession, namely the poor.

Additionally in America it was found that cutting corporate taxes actually offered the least stimulative effect on the economy compared to other demand side measures such as income tax cuts and food stamps:

burnett-20090129.jpg

Examine the table on left.  It was found that cutting corporate taxes would only lead to a $0.30 increase of real GDP for every dollar spent or tax cut by the federal government. This compares with the more stimulative effects of spending increases such as extending unemployment benefits ($1.64), increasing food stamps ($1.73), increased spending on infrastructure ($1.59).

Also see this item by Media Matters debunking right-wing myths on corporate tax in America.

Written by defennder

June 7, 2009 at 10:47 AM

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  1. […] Go here to see the original: Why cut corporate taxes? « Furry Brown Dog […]


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