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As a business owner, I am well aware of how this works. A corporation only pays taxes on profits. Hiring an employee is a cost. Businesses that increase revenues often expand in order to avoid paying taxes. Instead of paying tax, if the business expands, the costs of expansion will mitigate the tax burden. Would a business owner rather pay taxes or hire a new employee? The latter is the rational choice. When corporate taxes are higher, businesses have an incentive to increase employment.
If the corporate tax rate is lowered, there is less incentive to “dodge” taxation by bringing on new hires or purchasing new equipment. Large corporations can avoid paying taxes by using tactics such as accelerated depreciation. Small businesses, which employ the most people, cannot take advantage of such strategies.
Despite the lack of empirical evidence that lowering corporate taxes increases employment and stimulates the economy, both parties support this move. Barack Obama calls for a reduction in the corporate tax rate, down to 28%.
Senator John McCain points out that “we all know there are loopholes that are outrageous”. However, there is little talk of closing these loopholes, and an acknowledgement that grid-lock will prevent a massive overhaul of the tax code. The one thing both parties can agree upon — corporate taxation should be diminished.
Perhaps the point of dragging Apple into the spotlight is to bolster the desired policy. Both parties want to decrease the corporate tax rate. Tim Cook gives them a compelling reason as to why this should happen. It remains to be seen whether the average American will reap any benefit. History has shown that decreasing corporate tax rates can actually decrease employment. Large numbers of unemployed people makes for diminished labor costs. Products can always be sold to emerging markets overseas, and much of that money may end up staying offshore. A desperate workforce is good for the bottom line of major corporations.
Despite the brouhaha over Apple dodging taxes, don’t believe the hype. Apple does escape taxation, but there are far worse offenders. At least they pay taxes. They are the victims of their own success. Although they are not the most egregious tax dodgers, they are one of the biggest and most visible corporations in the world. By bringing Apple in to testify, the powers that be are manufacturing consent to lower the corporate tax rate. While the U.S. does have one of the highest corporate tax rates in the world, a plethora of loopholes allows most corporations to pay very little. Cook and Bullock are championing a cause that both Democrats and Republicans support — wealthy corporations should get a break, and the middle class should shoulder the bulk of the tax burden. The hype obscures the reality.