Overview of Pre-Pandemic Corporate Tax Cuts:
Before the pandemic, both the U.S. and India reduced corporate tax rates to stimulate economic growth.
With enough time passed, the effects of these tax cuts can now be assessed despite the economic disruptions caused by the pandemic.
Impact of U.S. Corporate Tax Cuts:
Tax Cuts and Jobs Act (2017): Implemented by former President Donald Trump, this law reduced the top corporate tax rate from 35% to 21%, aiming to boost investment, growth, and employment.
Proponents expected significant increases in investment, productivity, and wages.
However, studies show a modest investment increase of 8-14%, resulting in only a 0.9% long-term GDP increase and less than $1,000 annual wage increase per worker—far below the projected $4,000-$9,000 wage increase.
The tax cuts led to a 41% reduction in long-term tax revenue, negatively affecting the fiscal health of the U.S. economy while benefiting corporate profits more than wages.
Impact of Corporate Tax Cuts in India:
India reduced corporate tax rates from 30% to 22% for existing companies and from 25% to 15% for new companies, resulting in a tax revenue loss of around ₹1 lakh crore in 2020-21.
Despite reduced unemployment rates post-pandemic, the corporate sector has not significantly contributed to job creation.
Much of the employment increase is in insecure, unpaid family work, particularly in rural areas.
Regular wage employment has declined, and wage growth has barely outpaced inflation
Corporate tax collections have grown post-pandemic, but this growth hasn't translated into increased employment or wages.
Instead, companies, particularly in tech, have laid off workers.
The share of corporate taxes in India's gross tax revenues has decreased from nearly 32% in 2017-18 to 26.5% in 2024-25, with the burden shifting to income taxes (30.91%) and GST (27.65%).
In response to declining corporate tax contributions, the Indian government has sought new revenue sources, such as removing indexation benefits and taxing long-term capital gains.
Challenges and Considerations:
Tax cuts alone may not boost investment if businesses are uncertain about future profits, especially in an economy recovering from pandemic-related disruptions.
Reducing profit taxes primarily benefits existing capital, with minimal benefits for wage earners unless investment significantly raises employment, productivity, and wages.
Economists suggest high taxes on existing profits combined with increased incentives for future investment to balance the benefits of tax cuts with economic stability.
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