The Effects of Corporate Tax Rate on Employment

Effects of Corporate Tax Rate on Employment in the U.S.

There has been a great deal of deliberation lately over the effects of the corporate tax rate on employment in the U.S. Various economic research suggest that reducing U.S. corporation tax rate to an internationally competitive proportion would significantly minimize the cost of capital, which consequently would enhance capital investment, leading to more jobs. In contrast, some experts have downplayed the effect of lower corporate tax rate on employment. This paper will respond to the question as to whether a reduction in the corporate tax rate will result in businesses hiring more workers by summarizing researchers’ key arguments.

Effects of Policy Changes on Unemployment

There has been a definite trend among countries to reduce the rate of corporate taxes in a bid to come up with an effective means of reducing unemployment. For instance, between 2000 and 2003, there was a drop in the corporate tax rate on average by 2.8% in OECD nations and by 3.4% in EU15 (Michaelis & Birk, 2006). The effects of such policy changes have been widely discussed in literature. For instance, a study conducted by Michaelis and Birk (2006) provides compelling evidence that can help in explaining the impacts of reducing U.S. corporate tax rate and responding to the question as to whether it can alleviate the unemployment problem. According to Michaelis and Birk’s article, a cut in company tax rate can help in increasing the motivation to save, leading to higher growth rate. At the same time, owing to the capitalization effect, businesses can find it more reasonable to employ additional workers. However, according to the article, such outcomes can efficiently be met if lower company levy is funded by a higher payroll tax rate (Michaelis & Birk, 2006). Regardless, the paper supports the notion that cutting corporate tax rate can result in businesses hiring more workers.

Encouraging Corporate Investment and Economic Growth

Other inquiries also support Micahelis and Birk view that a reduction in the corporate tax rate would lead to businesses hiring more workers. According to Meric, Meric, and Sprotzer (2013), lowering the company tax rate would encourage corporate investment, increase stock prices, and lead to economic growth, thereby increasing employment. For instance, the authors point out that the current double taxation on dividend income and capital gain in the US places more burden to business shareholders, thereby discouraging investment (Meric, Meric, & Sprotzer, 2013). At the same time, there is an argument that a reduction in corporate tax rate without increasing dividend income tax rate would lead to a higher stock market, contributing to an increase in economic activity in the US. An upsurge in economic activity, conversely, will encourage investment by corporations, which will have to employ more people as the demand for goods and services grow. Meric et al. (2013) also make an argument that nearly 70% of companies in the US do not pay any dividend, and all the retained earnings are reinvested. Therefore, a significant reduction of the corporate tax rate will likely lead to a considerable increase in corporate investment, thereby resulting in more employment opportunities.

Impact on Entrepreneurship and Economic Development

Corporate tax rate has also been associated with entrepreneurship in trying to examine its impact on employment. Entrepreneurship is crucial when it comes to economic development, given that it helps in creating new products and services, thereby forcing existing firms to establish new business divisions to handle the new offerings, which in turn leads to more workers being employed. Many researchers agree that through reduction in corporate income tax, the United States government can exert a considerable, though small influence on private enterprise activity (Block, 2016). For instance, lowering company income tax rate can increase profit for incorporated firms in the US, thereby increasing incentives for existing firms to innovate more and for new products and businesses to be created. Additionally, studies reveal that corporate profits taxation can have an impact on the type of entrepreneurship, as well as quantity (Block, 2016). For example, as outlined in some studies, high corporation tax rates are not exclusively associated with negative effects on employment (Block, 2016). It can also lead to an increase in the capital size of established businesses along with the informal sector, thereby increasing higher chances of growth potential, which is associated with the reduced unemployment rate.

Effects of Corporate Income Tax on Investment and Entrepreneurial Activity

Other scholars have also presented similar estimation on the impact of corporation taxes on investment and entrepreneurship in the United States. For instance, Djankov, Ganser, McLiesh, Ramalho, and Shleifer (2010) presented findings involving the effects of corporate income tax on standardized mid-sized domestic firms in 85 countries including the United States. The estimates of their results support the theory that company tax rate has a considerable effect on aggregate investment, foreign direct investment, and entrepreneurial activity. To be more specific, the findings revealed that corporation tax rates are associated with investment in manufacturing but not service (Djankov et al., 2010). Also, there was a correlation between tax rate and the size of the informal sector (Djankov et al., 2010). If these results can be generalized, then it could be argued that a reduction in company tax rate will increase economic activity in the United States, which in turn will encourage investment by manufacturing corporations. As a result, industrial firms will have to employ more people as the demand for goods and services grow. Also, the positive effect on the size of the informal sector will likely increase the number of people employed in that part of the U.S. economy.

Contrasting Views on the Effects of Lowering Company Taxation

Despite the substantial evidence linking reduction of corporate tax to increased employment, there have been contrasting views on the effects of lowering company taxation. There is an opinion that reducing corporation tax would have an opposite outcome on jobs. For instance, findings from a study suggested that higher corporate taxes might minimize unemployment (Feldmann, 2011). The explanation for such an assertion is that higher company levies would trigger a swap of labor for capital. In such a situation, trade unions would lower their pay demands in a bid to avoid job losses, resulting in more people being employed, and that the government would commit extra funds to more labor concentrated undertakings than companies (Feldmann, 2011). Nevertheless, for the results to prevail, they would need to overplay any negative unemployment consequence resultant from less start-ups, reduced domestic investment by existing businesses, and lower FDI influxes (Feldmann, 2011).

Conclusion

In conclusion, it is evident that corporate tax rate is crucial in growing the United States’ economy and increasing employment opportunities. The above discussion represents a summary of five inquiries on the impact of lowering or raising corporation tax on employment. Four out of the five investigations associate a reduction of corporate taxation to more people being employed. One study found a different view that increasing company tax rate could, in fact, lower unemployment rate in the U.S. However, almost all the studies point out that certain conditions need to be met if the estimated effects on employment are to be felt. Therefore, this paper concludes that a decrease in the corporate tax rate might, but not necessarily result in businesses hiring additional workers.

References

Block, J. (2016). Corporate income taxes and entrepreneurship. IZA World of Labor, 1-11. doi:10.15185/izawol.257

Djankov, S., Ganser, T., McLiesh, C., Ramalho, R., & Shleifer, A. (2010). The effect of corporate taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics, 2(3), 31-64. doi:10.1257/mac.2.3.31

Feldmann, H. (2011). The unemployment puzzle of corporate taxation. Public Finance Review, 39(6), 743-769. doi:10.1177/1091142111423019

Meric, I., Meric, G., & Sprotzer, I. (2013). How lower corporate tax rates would spur economic growth and reduce unemployment. Journal of Taxation of Investments, 31(1), 45-52.

Michaelis, J., & Birk, A. (2006). Employment and growth effects of tax reforms. SSRN Electronic Journal, 23, 909-925. doi:10.2139/ssrn.572846