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Arbor Outlook: Should We Set a Minimum Effective Corporate Tax Rate?

By Margaret R. McDowell, ChFC®, AIF®
Arbor Outlook

"'Cause from those total wages earned...

Down to that net amount that's due;

I feel the painful sense of loss between the two."

"After Taxes" as performed by Johnny Cash

Recently I was "solving the problems of the world” with some family and friends, and the corporate tax rate became a topic of discussion. Afterwards I performed a little research. 

The U.S. corporate tax rate was lowered to 21% by virtue of the Tax Cuts and Jobs Act (TCJA) of 2017. Prior to this legislation, our 35% corporate tax rate was the world’s second highest. 

Most countries utilize several tax years to lower their corporate rate substantially. Kuwait lowered its rate from 55% to 15% in 2009, which represents the only larger single-year corporate tax decline than ours in this century. Canada's corporate tax rate was phased down from 36.6% to 26.5% over a nine-year period.

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The United Arab Emirates maintains the highest corporate tax rate, at 55%, but only certain energy companies pay this rate. France, at 31%, and Japan, at 30.62%, are also on the higher end.

Countries with very low corporate tax rates are typically small, less economically developed and are hoping to attract capital from abroad. My parents’ homeland of Ireland has used a low tax rate to grow their economy for years. A few countries in the Caribbean collect no corporate taxes.

The global average corporate tax rate is just under 24%. Since 1980, corporate tax rates have been declining internationally. Globalization means capital can easily flow to lower-cost and lower-tax countries, so a lower corporate rate in the U.S. makes sense. 

Regardless of the actual rate, some huge companies pay a much lower effective rate. They may not show much of a profit because they spend what would have been taxable profits on growth initiatives, thus reducing their tax bill. If the untaxed profit which is plowed back into the business produces more revenue and income in future years, investors benefit without shaving off too much for Uncle Sam’s take. 

Equality amongst corporate taxpayers thus represents more of an issue than what the actual corporate rate is. Large companies with international operations can find ways to pay less in taxes than small business owners, who make their money here at home and can’t play the international tax game. 

A more judicious process might be to set a standard corporate tax rate, but also a minimum effective tax rate. I believe this would benefit small business owners tremendously and put them on more competitive footing with larger companies. It seems ludicrous for wildly successful American companies to pay virtually no corporate taxes. Certainly we don’t want companies overtaxed; it just makes sense that every company should pay its fair share, or at least not be competitively advantaged over another company simply because they pay far less in taxes.  

If Washington would simply let us, we could correct all the world's problems and get things on the right track, couldn't we?  

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Destin, FL. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.