In his article, Greg Ip at The Wall Street Journal gives a warning that cutting the corporate tax rate has nothing to do with economic growth and increase in employment in contrary to what the White House promised. Before anything else, the statutory rate doesn’t contribute to the entire corporation’s tax. In many countries, extra tax provisions such as deductions and tax credit are offered to change the tax rate on business income.
Moreover, factors that have strong impact on the business investment’s tax are the capital cost recovery allowances. When the time for capital investment deduction is either increased or decreased, the deduction of stream’s value changes at the same time. Longer depreciation time will add a greater portion of taxes on the capital purchase resulting to greater taxes on capital investments.
This is not good. More deductions in a longer time mean businesses have to pay taxes on their costs and profits. On the other hand, shorter time for deductions allows the cost of investment completely eliminated from the tax base. Most of all, the investment is fully expensed right away and the entire cost is considered tax purposes. This excludes the taxes on average returns.
More and more experts have preferred effective marginal tax rates than statutory rates to adjust differences in capital allowances. From 2008 to 2011, the effective corporate tax in the UK increased despite the dropping of the statutory rates. Meanwhile, the good thing happened in Canada. The 2007 tax reforms have speeded up and increased capital allowances for nonresidential buildings and other equipment while the corporate tax rate is reduced at the same time. These pro-investment reforms have caused significant decrease in corporation’s taxes in Canada.
Meanwhile, there is an ongoing debate on how corporate tax cuts affect employment. Specifically the Conservatives believe that cutting the current corporate tax rates of 16.5% has something to do with the rate of employment. But how the cutting of corporate tax really generates more jobs? A claim based on Tory’s plan says that reducing the corporate taxes leaves employers more cash and would allow them to hire more employees in the company. However, this assumption doesn’t work with all companies who don’t actually need more employees and in fact spend their money to other form of investment such as buying new equipments or add more to their savings.