Interesting letter and column in the May 6 Signal. Let’s start with the letter. The letter writer in discussing the “GOP” corporate tax rate cuts asserts that the corporate tax rate in the 1950s was 93%. This is, not to put to fine a point on it, not true. In the 1950s and 1960s the effective corporate rate was approximately 50% (in the 1960s it was 22% of the first $25,000 and 48% on the balance of taxable income). As a result corporations divided their operation into separate companies to spread out their taxable income among as many entities as possible, thereby multiplying the initial $25,000 benefit. I worked for one company that had 200 related entities, all of whom performed separate functions — an accounting subsidiary, a janitorial subsidiary, etc. — thereby lowering the effective rate on the enterprise.
The rest of the letter is, to put it mildly, a bit of a pipe dream — corporations look to lower taxes (as all of us do). If they do so by spending money on deductible expenses, then they recover a portion of that expense in tax saving — but only a portion. If they pay lower taxes as a result of a rate reduction, then they can use the available funds for whatever uses they deem in their best interest. (Again, just like the rest of us.) If they have a need for research and development then they will spend some portion of the tax savings on R&D, assuming they are not already fully funding R&D.
For example, individuals can deduct interest expense on loans on their primary residence. Assuming an individual is in the top bracket (assumed to be 40% for ease of calculation), has a loan on which he pays $1,000 per month, $750 of which is interest, then he can deduct the interest payments of $9,000, which will result in a tax reduction of $3,600, for which he spent $9,000.
As for Mr. Jim de Bree’s column, it leaves out one important point — as almost all economists agree corporations do not pay taxes, they pass them on. They pass them on to employees in the form of lower wages, to customers in the form of higher prices, and to shareholders in the form of lower return on investment, which equates to a lower stock price.