Corporate Taxes Are Harmful for Growth
Unfortunately, U.S. has second highest corporate tax rate among OECD countries.
TAX FOUNDATION -- In a blockbuster new study titled "Tax and Economic Growth," economists at the OECD studied the effects of various types of taxes on the economic growth of developed nations and found that "corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes."
The main recommendation of the study is that if countries want to enhance their economic growth they would do well to move away from income taxes - especially corporate income taxes - toward less distortive taxes such as consumption-based taxes. The key to creating a growth-oriented corporate income tax system is to impose a reasonably low tax rate with few exemptions.
The study is particularly timely in light of the new OECD rankings of corporate taxes among the 30 OECD nations. It shows that the U.S. continues to have the 2nd highest overall corporate tax rate among industrialized countries. Only Japan has a higher overall rate (see chart above, see full list of countries here).
The main recommendation of the study is that if countries want to enhance their economic growth they would do well to move away from income taxes - especially corporate income taxes - toward less distortive taxes such as consumption-based taxes. The key to creating a growth-oriented corporate income tax system is to impose a reasonably low tax rate with few exemptions.
The study is particularly timely in light of the new OECD rankings of corporate taxes among the 30 OECD nations. It shows that the U.S. continues to have the 2nd highest overall corporate tax rate among industrialized countries. Only Japan has a higher overall rate (see chart above, see full list of countries here).
32 Comments:
And then we wonder why factories are moving overseas...
Either just to blame greed then think about actual reasons. Especially, if once though out those reasons go against your core beliefs.
If this is true why has US economic growth -- measured in terms of per capita gdp -- been better since corporate profits taxes were created than it was when they did not exist?
Probably because corporate income taxes have been around since 1909 in the US. Do you think comparing PER CAPITA growth prior to 1909 to today is a good measure?
And yet Japan, US, and Germany (with its now lower, but still high rate) have some of the biggest economies in the world...
Gee, I guess the policy isn't working? Seriously, what kind of growth rate do you want? 10%? I doubt you'd get anywhere near that with even 0% corporate taxes.
professor perry, you may be a bit behind the curve on this one.
have you considered the fact that most corporations don't pay any tax?
"The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes - despite having a combined $2.5 trillion in revenue."
A very comprehensive study by the Congressional Budget office also concluded that corporate tax cuts and capital gains cuts produce more economic growth than personal tax cuts.
No one is suggesting a zero rate of corporate tax. Isn't the question of growth about retaining jobs and investment in the U.S.?
If the combined tax rate is higher than Europe which can offer a highly educated workforce, isn't that a concern?
Bobble,
Read the fine print:
"some corporations reported zero income before deducting expenses while others said they had zero net income after deducting expenses. Either way, those companies reported no tax liability, the GAO said."
"But many of the companies the report found had paid no tax were likely small businesses that pay other taxes. Generally, many small firms, because they do not have shareholders, are able to shift corporate income to individual income."
A company pays taxes on net income not gross sales. If the owner of a small business takes the profit as salary, taxes are still paid...income taxes.
Transferring profits between companies to evade taxes is illegal. Please note the following from your link:
"The GAO study did not attempt to determine if companies were abusing transfer prices, but it said that potential abuse of transfers could reduce the amount of taxes companies pay in the United States."
In other words, the report did not prove abuse merely the "potential" of abuse.
Sheesh
Another evil multi-national that pays no taxes.
qt"In other words, the report did not prove abuse merely the "potential" of abuse.
Sheesh"
did i mention abuse?
read carefully, qt. i was pointing out that its sort of useless to call corporate taxes harmful if the majority of corporations aren't paying any.
i'm not part of the 'evil corporations' crowd.
sheesh, indeed.
still more corporations that do not pay taxes - sorry couldn't resist:)
Bobble,
Does a report backed by Levin & Dorkins really establish that the majority of corporations do not pay taxes? All corporations would include tax-exempt, incorporated charities, corporations with a net losses in a fiscal period, and small businesses that pay their net income out to the owner who pays income taxes.
Have you have adequately demonstrated that the majority of corporations do not pay taxes?
Question: Do you think that the current corporate tax rate has any adverse effect on growth?
still more corporations that do not pay taxes - sorry couldn't resist :)
Bobble,
Does a report backed by Levin & Dorkins really establish that the majority of corporations do not pay taxes? All corporations would include tax-exempt, incorporated charities, corporations with a net losses in a fiscal period, and small businesses that pay their net income out to the owner who pays income taxes.
Have you have adequately demonstrated that the majority of corporations do not pay taxes?
Question: Do you think that the current corporate tax rate has any adverse effect on growth?
One wonders why ALL forms of government extortion aren't considered when talking about taxes on corporations?
Complying with government regulations consumes $1.4 Trillion
($1,028 billion federal mandates, $343 billion state & local government mandates)
14.9% of the economy - $4,680 per man, woman and child
qt:"Have you have adequately demonstrated that the majority of corporations do not pay taxes?"
LOL, yes. not that i really care. again, i'm not part of the 'evil corp' crowd.
please offer some credible proof that the majority of corporations do pay taxes, and i'll change my mind.
btw, your links don't work
Example of a multi-national
Example of an incorporated tax-exempt charity
Neither of the above would be required to pay taxes however the deadweight issue remains.
Speaking of not working, that CNN Money report was just riddled with uselessness...
"The study showed that 28% of foreign companies and 25% of U.S. corporations with more than $250 million in assets or $50 million in sales paid no federal income taxes in 2005. Those companies totaled a combined $372 billion in sales for the largest foreign companies and $1.1 trillion in revenue for the biggest U.S. companies"...
Yet nothing there is the story to show the credibility of that statement...
"The GAO report, which did not name any specific companies, said that some corporations reported zero income before deducting expenses while others said they had zero net income after deducting expenses. Either way, those companies reported no tax liability, the GAO said"...
Yet another bizzare claim with nothing credible to back it up...
There's not even a link to the GAO report so we don't even know if David Goldman 'CNNMONEY' staff writer may be making all this up as he goes along...
People who look at news with a critical eye understand what the letters in CNN really stand for: Credibility Not Necessary...
Well this interesting: "The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes," Dorgan said in a statement"...
Well of course Dorgan would be to embarrased to tell the citizens that they DON'T pay their fair share of the costs to shoulder the nanny state, its the rich that are extorted most to pay the way for the whiners...
While I concur with the thesis, I don't think the graph suggests it at all.
You need a comparison of the growth rates of their GDP somehow worked into it, showing some kind of inverse correlation.
The USA would seem to be an exception at the very least, as well.
> please offer some credible proof that the majority of corporations do pay taxes, and i'll change my mind.
Bobbie, does one really care about "the majority of corporations"?
There are a lot of them which inherently don't, as mentioned -- small corporations and charities being specific examples, and certainly comprising a huge chunk, if not "the majority of", all corporations.
The local blood bank is a NFP corporation with 500-odd employees spread across 3 states. They don't pay taxes, AFAIK, because they are NFP. Can't pay taxes on profit you don't make.
So your claim, and link, are of doubtful relevance, since presumably the issue isn't "all corporations" but "a percentage which are large enough to make substantial profits that, taxed, would add up to real money".
OBH,
GDP comparison would be useful if corporate tax was the only factor that affects GDP.
Wouldn't we also have to consider productivity, labour restrictions, dynamism, regulatory climate, the extent of government-run businesses, trade policy, monetary policy, length of time to open a business, entrepreneurship, innovation, etc.?
Juandos,
You know someone is telling porkies when they refer to these companies making trillions in SALES rather than PROFIT as though the cost of labour, equipment & materials to run a business is a bogus tax loophole.
What would one expect from Levin & Dorkins?
I have a friend here in town who is a redistributionist. He's always complaining about corporations and the rich not paying their fair share. I found out a week or so ago that his heating and air business is incorporated and he's paying himself a salary+dividends to avoid paying "his fair share". Too funny.
Robert,
I oversee 5 companies only 2 of which are active. The reality is that not all corporations are even active in the U.S.
Agree with the irony. Your friend is, however, making a rational choice based upon incentives and complying with existing tax code as you describe it. His business is paying its fair share. Dividends are paid from retained earnings upon which taxes have already been levied. Whether the money is taxed in the hands of an individual or a corporation, taxes are still collected.
There is no free lunch.
I fail to see the link "Corporate Taxes Are Harmful for Growth".
Now, I am all for low or no corporate taxes as these taxes are paid down the line by individuals anyway. But I do think the link is a bit far fetched.
Low corporate taxes do however seem to keep companies "at home".
rg
rg,
A bit of macro-economic theory:
GDP = Consumption + Investment + Government spending + Exports - Imports = C + I + G + X - M
ano,
Thanks for the link. I'm sure you meant well. But when I said "I fail to see …" I meant that I DO NOT BELIEVE that there is a correlation, as you can see for example in this document
http://www.oecd.org/dac/ictcd/docs/otherdocs/OtherOECD_eco_growth.pdf
There are simply tooooo may other factors which are much more important in enabling/restricting growth than corporate taxes.
rg
ano,
Thanks fort he link. I'm sure you meant well. But when I said "I fail to see …" I meant that I DO NOT BELIEVE that there is a correlation, as you can see for example in this document hier
There are simply tooooo may other factors which are much more important in enabling/restricting growth.
rg
rg,
Interesting article. Agree that there are many factors that contribute to GDP growth. According to your report, one of the most important of these factors would appear to be investment.
Doesn't the U.S. by virtue of having the 2nd highest corporate tax rate out of 30 OECD countries offer lower ROI?
There are other factors that influence the decision of where to locate a business such as high productivity, a highly skilled workforce, communications and transportation infrastructure, political stability, regulatory burden, climate, litigiousness, etc.
Will agree that corporate tax is by no means the only factor driving investment. This metric is readily quantifiable which doesn't help attract investors.
In the past several years, investment destinations have greatly expanded. The U.S. is no longer the only game in town.
> There is no free lunch.
Of course there is!! That's how the Dems set up the Social Security System!
One big free lunch program.
Are you trying to suggest that FDR and his cronies did something... wrong?
How dare you!
:oP
.
"You know someone is telling porkies when they refer to these companies making trillions in SALES rather than PROFIT as though the cost of labour, equipment & materials to run a business is a bogus tax loophole"...
Good point qt...
Let's say for sake of argument that bobble's point is somehow valid: "most corporations don't pay any tax?"...
Share holders pay taxes, the corporation pays taxes for the goods and services it purchases, corporation employees pay taxes and FICA which is matched by the corporation and the list of extortions goes on and on...
This is all wealth that is stolen from the economy...
This is money that for the most part will be wasted...
This is what the socialists/marxists just can't seem to grap...
Juandos,
"The GAO report, which did not name any specific companies, said that some corporations reported zero income before deducting expenses while others said they had zero net income after deducting expenses. Either way, those companies reported no tax liability, the GAO said"...
I don't know how someone can read this and not get the picture...some companies had zero revenue (ie. they are not active companies - they did not generate any of the trillions in sales) and some had no net income (ie. they did not make any profit). The IRS & Rev. Cda. can even reject business losses and grind the taxes out of a company. Every company is required to file a return whether they make money or not.
Absolutely agree with you that taxes are by nature confiscatory and the proceeds are largely frittered away. FDR left us a legacy of thinking that government is the answer to every problem when in fact, misguided government policy often creates the problems.
Consider Obama's lastest great idea: a windfall profits tax.
Or the role of Bassel II in the credit meltdown.
Or the legacy of the luxury boat tax
Strangely, socialists/marxists never seem to check the rhetoric against the history.
Hey qt, great history link!
Most appreciated...
Regarding the luxury tax on boats, yeah that was sad...
Whole towns in Wisconsin basically died because of that...
More of that Democrat class warfare in action...
"FDR left us a legacy of thinking that government is the answer to every problem when in fact, misguided government policy often creates the problems"...
Well when one considers the revisionist history regarding FDR and compares it the real history is it any wonder that so many people have been so ill informed for so long in this country?
Thanks, Juandos,
Look forward to reading these articles on FDR.
Hopefully, Obama & Pelosi will shoot themselves in the foot.
Obama had a pretty poor showing over Georgia...reading from notes, glancing up to the right, down at the notes, up the the left, back down at his notes & up to the right. Interesting body language...he never looked directly at the audience. His position kept morphing every few days.
Unfortunately, morality does not produce very good public policy. The most misguided notion is the concept of the "profit motive" when a business must attract and compete for capital. Financial performance is not optional but critical.
If you think the past was scary....
The more I read, the more I am finding that the "good guys" aren't good and the "bad guys" aren't as bad as some would have you believe.
qt says: "The more I read, the more I am finding that the "good guys" aren't good and the "bad guys" aren't as bad as some would have you believe"...
Hmmm, again we could possibly have a problem defining, 'good' and bad' here but I do believe your point is valid...
In my own experiences the, 'bad guys' are bad, in some cases seriously bad but the so called, 'good guys' don't have very clean hands either...
I think a lot of what drives the definitions of good and bad is just how factually informed the public is...
"Unfortunately, morality does not produce very good public policy"...
Exactly!
Looking at your link, specifically the executive summary I was struck by the following: Second, that business is vulnerable to new forms of ‘legal activism’. This reflects three trends: the shift by NGOs away from attacking to exploiting legislation; the
emergence, particularly in North America, of a highly profitable class actions industry; and the arrival of a new generation of lawyers, many of whom put correcting social and environmental injustice ahead of salary and career development.
How much of this is driven by the pandering of elected politicos to specific groups?
Take the human induced global climate change crapola for instance...
Pandering by liberal politicos (on both sides of the aisle) to special interests groups with what I can only define as a bent socialist agenda has put our nation's collective wealth in jeopardy...
The liberal politicos put together the, 'legislation' that NGOs are exploiting...
BTW that link is quite interesting... Thanks qt
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