The Democrats in the Senate are proposing cuts in corporate income taxes. This proposal is a great example of how something that is a good idea in principle can be crafted in such a way that it makes no economic sense at all, and in some ways may be harmful. While this bill will save smaller corporations (actually their customers, employees and shareholders) some money it is constructed in such a way that it will have no stimulative effect on corporate investment and in some cases may act as a disincentive for corporations to grow.
If the plan is passed, in certain situations smaller corporations, the group that the cut is supposed to help, will actually find themselves facing higher not lower marginal tax rates. The proposal will exempt the first $25,000 from the 6.9% corporate tax for businesses earning up to $100,000 and the first $15,000 for businesses earning up to $200,000. Once a company earns more than $200,000 all exemptions are lost. This sets up a situation where the marginal tax rate, i.e. the tax paid on an additional dollar earned, jumps up well above the standard 6.9% when companies pass the income thresholds of $100,000 and $200,000. This is because of the lost exemptions.
Once a company earns a dollar over $100,000 it not only pays the 6.9% rate on that dollar but it also pays 6.9% on the $10,000 worth of exemptions that are lost. Similarly, once a company earns a dollar over $200,000 it will pay not only 6.9% on that dollar but also 6.9% on the $15,000 exemption that is lost. For example, what this means for a small corporation considering new investments that would take them from $100,000 to $150,000 in income is that the marginal rate on that extra $50,000 will not be 6.9%, but 8.28%. For a $200,000 company deciding to expand in order to earn an additional $50,000, that marginal rate would be nearly 9%. Because of this, for certain small companies the Democratic proposal to cut corporate taxes for small corporations may, ironically, actually discourage some of those corporations from expanding.
